Section 121 Exclusion for a Duplex when Occupying Both Units

[David Beadles]

Currently, my mother-in-law lives with me and I claim her on my tax return. I am considering purchasing a duplex where my wife and I live in one side and my mother-in-law lives in the other. 

If I decide to sell in 2 years, does the entire property qualify for the Sec. 121 exclusion since I'm not renting it and my dependent occupies the other side?

[Eamonn McElroy]

@David Beadles

Not impossible by a long shot.

Your tax pro should be discussing the Bentsion Cohen case (2014) with you.  They lost, but it gives valuable insight into how the courts examine the issue, for which the court admitted this particular issue is a gray area not examined by the code and/or regs.  It's purely a facts and circumstances based analysis.