Minimizing taxes implications on primary residence: 121 plus 1031

[Curt Wortman]

I'm considering selling my primary residence and moving out of state... yes I'm from the amazing overpriced California. Before making any decision I'm researching what are my options for minimize the tax implications. I will be purchasing a property on the East Coast at a fair less amount taking any remainder gains and purchase rental income properties.

Background: I have lived in my home for 10 years watching the prices of house steadily climb. From my research on 121 capital gains exclusion, this would allow for $500K tax free since I'm married. The challenge is to minimize the tax penalty on the remainder of capital gains. From a simplistic calculation the remaining taxable income = Purchase Price - Sale Price - $500K from 121. The rental income of this California would be ~$4k/month which only covers existing mortgage and property taxes, therefore much better ROI for cash flow elsewhere assuming that appreciation would remain flat for the next few years.

My limited understanding:

1. If you live in the residence for 2 of 5 years, then I can apply for the 121 benefit. Check!

2. 1031 exchange could be used within the 3 year remaining. Proper handling of identification and conversion per the 1031 stated timeline would be required.

Do I need convert the property to a rental to take advantage of 1031 exchange? If so, then how long do I need to wait selling this newly converted rental property?

I would like to hear from the experts if they have any creative solutions to minimize taxes. I will be using a CPA in conjunction but there is a broad spectrum of knowledge in the forums that might result in some better options...