Legal Question in Real Estate Law in California

It does not have to be rented at all before converting to owner occupied status in order to take the section 121 exclusion. There is, however, a five-year holding requirement after the 1031 exchange before the owner can claim the section 121 exclusion from capital gains tax on the first $250,000 or $500,000 (depending on filing status) worth of capital gains. It does not matter whether the owner occupies it or rents it out, as long as the owner satisfies the requirement of owner occupying for two out of the five years immediately prior to claiming the section 121 exemption. So the owner can move in immediately, live there for five years and then sell, or move in immediately for two years and then rent it for three, or rent for three and then move in for two, or rent for one, move in for one, rent for two, move in for one, and so on for any combination of at least two years in five.

This is a question of intent. If you immediately convert to personal use, the IRS can argue that this was not qualified as a like kind exchange under 1031, because you did not intend to exchange for qualified investment property, but exchanged for a personal residence. The longer you wait, the less likely it is that the argument can be made that you did not have the proper investment intent. Actually renting the property ( rather than just listing it for rent) also helps a lot. Of course posting the question itself argues that you did not have the proper intent.