Selling a SFH Househack and the 2-Out-Of-5 Year Rule

[Zach Johnson]

Greetings all,
As you know, the 2-Out-Of-5 year rule says: you must have lived in your home for a minimum of two out of the last five years before the date of sale in order to take an exclusion from capital gains upon sale.  Additionally, there are partial exclusions to that rule as many of you are aware, as well as depreciation recapture. 

I'm confused about whether I qualify to take the capital gains exclusion.  I bought a SFH, I lived there for 21 months while renting out rooms.  Then I moved away when my job allowed me to work remotely.  Now I am being called back to the office and plan on moving back into this residence.  Since the housing market is wild right now, I want to know if I qualify for the exclusion after I've lived there an additional 3 months.

The section below copied from Pub. 523 is relevant.  The "space within the living area" was rented, therefore I thought I would qualify.  However, the next exception states space formerly used for a rental. 

Three questions:
1.) If you buy a SFH, move into it, then rent out rooms while you live there, does the IRS still consider it your primary residence?
2.) Does the property turn into a rental when I moved out?  Or is it still "renting space within the living area"?
3.) Which exception applies (below) if I move back into it as a primary residence and continue to rent out rooms?

https://www.irs.gov/publicatio...

Publication 523

"Exceptions.The following situations apply when using only a portion of the main home for business or rental usage and don’t affect your gain or loss calculations.

• 1.) Space within the living area.If the space you used for business or rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations (except for an adjustment to basis for depreciation, taken after May 6, 1997, to be recaptured and reported as ordinary income). Examples of spaces within the living area include a rented spare bedroom and attic space used as a home office.

• 2.) Space formerly used for business or rental.
  

  Space that was once used for business or rental purposes may be considered as residence space at the time of sale. A space formerly used for business is  considered residence space if ALL of the following are true.
  

  • You weren’t using the space for business or rental at the time you sold the property,
    
  • You didn’t earn any business or rental income from the space in the year you sold your home, and
    
  • You used the space as residence space for 2 years out of the 5 years leading up to the sale.
    
  If your space is considered as residence space at the time of the sale, then your former business usage DOESN’T affect your gain/loss calculations, unless you took or were allowed to take depreciation for use of your home for business or rental purposes. See Worksheet 2, line 5, earlier."