1031 and Sec 121 Experts - want to sell rental but tax worried.

[Patrick Irish]

I have a townhouse in the Bay Area norcal. Bought 12 years ago. Been renting it out 3 years as of March 2024.

Recent townhouse sold for $980k in my development in 6 days, $150k over asking (2/2, 2 car garage 980sqft). I bought mine for $375k, put about $200k in it. Did do the deprecation thing at least last 2 years though  

Wife and I FEEL we need to sell in order to use the equity for a down payment in order to stay local. Pretty close to being priced out actually.  

We told tenants and they moved out May 31st.

Is there in wiggle room in the 2 in 5 years in order to meet the $500k capital gains exemption? I think I had tenant move out like 2-3 months too late. 

1031 wise, do I have to rent it out for 2 years in order to avoid cap gains? I’d for sure lose $$$ with what rents are vs mortgages. Any creative ways to move into the house and not make it a primary? 

Last option an attorney told me today is send some bills over and ‘move in’ for the next years, maybe rent to a friend. I’d lose about $48k (mortgage, hoa, ins and prop taxes). No way we could move back, have two little kids and too much stuff for 980sqft. Only issue is housing will for sure go up $48k in the next two years. 

I have a phone consult with a tax attorney cpa tomorrow, hoping to determine capital gains if we sell but wanted to get some thoughts first.