They may deny it, but that would be in a audit and I'd make sure that my deductions (as with any questionable area) wouldn't cause a change in my return to trigger any significant issues with taxes and penalties.

So my 2015 (the year we started rehabbing properties full time) was audited.

We do internal audits periodically and even in this crazy sellers market over 90% of our clients are completing their exchanges with properties that they like.You'll love the power to take the deferred tax and make money off of it for yourself!!

my follow up question is, assuming an audit by irs where to take place, how would the irs determine, or ask you to prove, your primary residence?

If you were ever audited and the Service decided that you did a 1031 with the intention of purchasing your primary residence then your exchange would fail. 

That money will be treated as your money, judgments can be attached, taxes due as income, included in bankruptcy or assessments made in social security or other benefits.You get audited, the IRS wants to know where you got the additional 5K you failed to claim, it is in your account!

What most of the tricksters don't know is that after funding, loans are audited, your account is open for audit further back, like 6 or 12 months, this is where the lump sum is found.

If you do very well, get an auditor to audit your performance.(3) Advertise your results to investors.In step (2), if you don't do well, you probably need to start another incubator fund or look for a different career.

They are responsible for the taxes and insurance which we audit on a regular basis.

But, keep in mind, that anything that you do that looks like you are holding for sale vs. holding for investment can and will be used against you during an audit.