One of the problems many investors face is that they simply have no desire to reside in their rental property. So,they do a 1031 tax-deferred exchange,and obtain a property they would like to live in. Then
they reside in that property until the time limits have been reached and sell it as a personal residence, claiming the big exclusion. The problem here is that the government recently changed the rules. Now, if you previously did a 1031 tax-deferred exchange on the property, you must reside in it for the full five years before you get the exclusion. Apparently, so many investors were taking advantage of a combination 1031 exchange and exclusion that the government saw this as a tax loophole and moved to close it. While many investors are more than willing to reside in a home for two years in order to get the exclusion, far fewer are willing to do so for five years.