1031 exchange and conversion to principal residence

Dear 1031x: We have a second home that we have rented out for over five  years.  We wish to sell that property thru a 1031 exchange and use the  proceeds to purchase a new property as our principal residence. We know we have to hold the new property for five years, which we plan to  do.  Can we still use a 1031 like-kind exchange in this transaction?

Dear R:  Until 10/04 there was no question that you could not sell an investment property and buy a principal residence and claim 1031 tax deferral.  For that reason taxpayers would pretend to rent the new property for some time and then move into it.  In 10/04 IRC section 121 (deals with principal residence) was changed to state that if you did a 1031x and then converted it to principal residence you must hold the new principal residence for 5 years instead of only 2 in order to qualify for tax exemption under 121.  By making this change it seemed to be a tacit acceptance of this tax strategy.  Please remember that IRC section 1031 was not changed- investment for investment.  All I can really tell you is that there is substantial ambiguity in the tax code and no positive answer to your questioon.  

Steve Hickox
Attorney / President