It would be shown as the sale of your primary residence. The government acknowledged the possibility of this scenario and
created a special rule that applies specifically to it. When a property
has been acquired through a 1031 Exchange and later
converted to a primary residence, the owner faces a mandatory five-year
hold period before having the ability to sell obtaining the Section 121 exclusion (the exclusion of $250,000 or $500,000 on the sale of your primary residence). The taxpayor still must satisfy the minimum two of five-year occupancy as primary residence.
Your basis is still the same as the 1031 exchange amount, and you will have to account for the depreciation for the year it was a rental. If your gain is more than the $250,000 /$500,000 exclusion, then it will be taxable. If the gain falls within those limits, you won't have any taxable gain.
