Occupying a 1031 Tax-deferred Property As Your Principle Residence

In a previous post I mentioned that owners could occupy and then sell a 1031-acquired property without incurring capital gains. I just heard the IRS (possibly through a case settled by the Tax Court) issued a ruling addressing this situation.

Basically, owners may occupy a 1031-acquired property after it has been rented for three consecutive years. At that point, the owners could live in the property as their principle residence for two years (day-for-day) then sell the property and take whatever tax advantages exist concerning the payment/avoidance of long-term capital gains tax. However, the owners would still be liable to repay the recapture tax (no greater than 25 percent) for any depreciation taken using a 27.5 year schedule.

Hope this clarifies the situation.