No tax when selling if primary residence 2 of past 5 years?

[Chris Bingham]

I always believed that the rule was that if I owned and lived in a property as my primary residence for 2 of the past 5 years that when I sell it I would not need to worry about paying federal taxes on the gains if it is below their specified threshold.  

However, if I live in the property as my primary residence AND rent out the extra rooms to roommates can I avoid federal taxes on the profit when i sell it if I've lived in it for at least 2 of the past 5 years? I have claimed the rental income on my taxes and depreciated the property along the way as well.

[Dave Foster]

@Chris Bingham, at the least you'll probably have to recapture that depreciation.  My guess is that you and your accountant have prorated the investment vs primary portions of the property.  So when you sell you're actually selling two properties - one investment and one primary residence.  When you sell you can apply the exemption to the portion of the property that has been allocated to your primary residence.  

You're actually in a great position. When you sell you can get some of the profit tax free.  And to avoid tax entirely do a 1031 exchange on the other portion that has been allocated to investment. This will also solve that depreciation recapture issue.