Tax benefits - 1031 Exchange OR Section 121 exclusion on the same property...?

[Jake Andronico]

Accountants, CPA's and 1031 Exchange experts - this one's for you. 

I was discussing a scenario with my RE partner where a property could be considered a Primary Residence AND an Investment Property, which could potentially give the choice of either doing a 1031 exchange OR receiving the Section 121 Exclusion assuming a sale in year 4. 

1031 Exchange - has to be an "income producing property" and CANNOT be your primary residence to defer capital gains tax. 

Section 121 Exclusion - Has to be primary residence and a single person has a 250K capital gains exclusion, and married individuals have a 500K capital gains exclusion combined. 

SCENARIO - Property was originally a primary residence that you lived in for 2 years, you then rented it for 2 years, and now you want to sell it after 4 years of ownership. 

- You would have lived in this property as your Primary Residence for 2 out of the last 5 years. 

- You also would have rented this property out for the last 2 years....

When you go to sell, WHICH tax benefit do you receive? 1031 Exchange or Section 121? Or do you get the option of choosing between both...?

Any and all insight is appreciated. This one stumped us. Thank you!!

[Wayne Brooks]

@Dave Foster can give you the particulars.