You may find a 1031 exchange in your particular case won't work or even be possible. A 1031 exchange is for "like-kind" property. Since your primary residence is not income producing property, doing an exchange for rental income producing property may not be possible. If it is, then you may find it will not have the outcome you may desire.
IRC Section 1031 allows for tax deferral on the sale of a property used in a trade or business or held for investment when exchanged for like-kind replacement property to be used in a trade or business or held for investment. Section 1031 only provides for tax deferral as the original basis is carried over into the replacement property and capital gain taxes are owed when the replacement property is later sold and cash is received.
Section 121 allows for tax exclusion on the sale of a principal residence when the taxpayer lives in the property as their residence for two out of the past five years. Understand that does *NOT* mean you have to own the property for 5 years. If you own the property for 2 years and it's your primary residence for those two years, then you qualify for the capital gains exclusion.
Now everything you read refers to years. But the IRS counts days. So if it was your primary residence for a minimum of 730 days and you owned it "at least" 730 days, counting back from the closing date of the sale, you qualify for the exclusion.
The day of your closing when *you* purchased the property counts as a lived in day. The day of the closing when you sell the property does *not* count as a lived in day.
