Rules around converting a rental to primary residence

[Jeremy Lee]

Hey all,

We're facing another crossroads with what to do in terms of a 1031 exchange that my parents and I co-own (which I also live in with my wife and kids) with our current place and selling it in exchange for a place that's a little bigger. They have another property (in the Bay Area) that they are wanting to get rid of and had the idea of folding that into this 1031 exchange, however the heavily tenant-favored laws in the Bay Area are working against the current timeline and they either have to pull out of that idea or defer it. 

Currently we are leaning towards holding off on the 1031 exchange and just moving to the area we want to live in (South OC) and rent for a year. This would buy my parents time to figure out how to proceed with evicting the tenant up north (this could be a year long process anyway). This would also mean that we would seek to rent out the current co-owned property for about the same amount of time. My dad suggested that 1) we take all the rental income and 2) they transfer the deed/title to be solely in me and my wife's names. 

Can someone go over the caveats of both those suggestions? Can we really just collect the full rental income? Don't we technically need to "split" it based on ownership %? 

Also, another point of concern is if we 1031 exchange this property (regardless of whether they transfer deed/title or leave it as is) + my parents' other Bay Area property into a single property down down here. If we did that, would we be required to rent that new property out for a certain amount of time else risk disqualification of the 1031 exchange?

[Bill B.]

Double disqualified. 

You can’t 1031 a property your living in, only investment properties.  

You can’t 1031 in to a property you’re going to live in, only investment property. 

I don’t know why your parents are considering giving you some property but you’d be tax the same as if they gave you the cash as opposed to tax free at death. Of course you’re also assuming the tax liability.