Another 1031 Question - need an expert.

[Thomas Force]

I was at a wedding this weekend, and was talking with a friend who was working on disposing properties on behalf of a trust for an elderly friend. The elderly woman is now in assisted living, so two properties are involved. The primary residence has already been fixed up and put on the market.

Here is where we need help. She has a vacation home in Sag Harbor, NY, that she has not been to in many years. It has never been used as a rental or a primary residence. It was bought in 1984 for $40,000 - and would appraise for $900K today. 

I suggested a 1031 exchange - as the parties would be ok with trading for a property of similar or higher value much closer to where the elderly friend resides. She does not need the money from the sale of the vacation home, and would be willing to trade it for something that could be a rental and easy to get to - which will probably be on the Jersey Shore.

So I have read all of the rules on the 1031 exchange - including the articles on BP. My friend says she contacted her attorney - and said that the vacation property would have had to been used as a rental for 2 years before qualifying for 1031 treatment.

What say you? Does a property HAVE to have been a rental to qualify for a 1031 exchange? My position is that it has been an investment property simply through the huge equity gain over the years...

This property is in NY - do they have special rules?

Look forward to hearing from the experts. Thanks!