Sell Commercial biz that is also zoned residential or move in?!

[Chris Billington]

We have a close family member who has  a property in Denver, CO that has been a restaurant for over 20 years. The structure is an old house and the zoning in the area allows for a business or residential. The property should sell for upwards of 500K. Let's just say we get 500K on a sale for the purpose of this question. The property was bought a long time ago and is fully depreciated.  First off how do we determine the long term capital gains on this property. Second, what about having this family member move into the property for two years as a primary residence to save on the capital gains. We could simply add a shower to one of the baths. The thought is if it saves a big tax bill then it would be worth it to this individual. There's even the idea of running a coffee shop and living in a portion of the property although we aren't sure if this is even an option legally. They could also rent their current house out while living in what was once the restaurant providing an income in the mean time, including being a place they could move back into after 2 years.  Any thoughts/ideas on this would be greatly appreciated.  

[Bill S.]

@Chris Billington you really need to discuss this plan with a REAL ESTATE savey tax person. You can afford to pay someone with the amount of money on the line here. I know the capital gains exemption for personal residence now has a bunch of qualifies on it because people were doing exactly what you are suggesting. I think the regulations would limit the benefit from this strategy but I don't know the rules inside and out like you would need.