The partnership/LLC has most likely held the property long term as an investment, but once you drop out of the partnership/LLC and into tenant in common ownership and perform the exchange, there is a good chance the California Franchise Tax Board could audit you and disallow the exchange. 

But so many are talking about "flipping" these days and I think there is legitimate concern when an investor is using this vocabulary that even if they hold over a year there is a risk of them being perceived as dealers not holding property for productive use.As with most everything these days, due to the relatively few number of audits there isn't a great bank of case law yet on "flippers" who hold property over a year.  

It's worth it to me because I get to avoid filing a Schedule E which are heavily audited.

All of my negotiators recommend a deal after an exhaustive financial analysis and after verifying that all the requirements of a short sale are met (Like being listed with an agent, executing a 4506T, providing a hardship letter, bank statements, tax returns, Arms Length affidavit, budget, etc..) and then signing off and verifying all of the requirements are met so that when its all done, a subsequent audit from an outside entity or regulatory agent will confirm that it was done properly and NOT just because some talented negotiator thinks it should have been done.

If not, and you or one of your partners is audited, the initial reaction may be 'I see $150K profit on the HUD-1, but not on the person's return...'.

I would audit your current tenant: did they maintain the property? 

Having said that, in an audit or IRS challenge, the decision is all going to turn on your intent at the time you purchased the property you are considering converting to your primary residence.

You would also probably gain the benefit of a tax audit unless the house was donated to a well known charity!

I have not heard of any IRS auditor attempting to pick apart depreciation on a rental, not saying one has not, but it seems it would be a very inefficient use of time in an audit for something under 750k or so.

I'd probably start with seeing if you could find a commercial general liability that would cover all aspects of your businesses, if that's obtainable, then you won't be paying insurances "per job" so to speak, and the rating factors (gross revenue/payroll) would be fine because you won't be getting audited on something that you didn't use.