How Would You Structure A 1031 on a Primary?

[Dani Beit-Or]

If my wife and I own our own house which have appreciated well over 1 million, and I would like to use a 1031 exchange in order to defer taxes - 
I have these questions, let's assume we purchased it for $1 million, and it's now worth 2 million dollars and I lived in it for the past 3 years as my primary residence.

1. Will I still be able to use the $250,000 per spouse exemption on the appreciation, and how will this impact my 1031 exchange?

2. In order to benefit from a 1031 exchange to defer my taxes will I need to convert my primary residence into a rental property and if I do, what's the minimum amount of time that I need in order to hold it as a rental to make sure it qualifies for a 1031 exchange?

3. Say we rent it out for 1 years after we move out - will the defer amount in the exchange be our entire appreciation?  only the appreciation gained during the leasing period? and how will the $500k exemption play into it? 

[Dave Foster]

@Dani Beit-Or.  There's a way to make this work.  But it will take a little runway.  In order to qualify for the primary residence exemption you must have lived in the property for at least 2 out of the 5 years immediately prior to selling it.  You will get the $500K tax free.

To do a 1031 exchange you must be selling an investment property.  And then you will purchase a new investment property and all of the gain is tax deferred indefinitely as @Jaron Walling said.

The way to combine and get both advantages would be to move out and turn that property into an investment property for a year.  Then sell it.  You're now selling an investment property.  So you can do a 1031 exchange.  You will take $500K in boot from the 1031 exchange.  Normally this would be taxable.  But since you have lived in it for 2 out of the last 5 you would get that $500K tax free.

You set up a situation where you qualify for both.  Pretty awesome stuff!!