Simply gifting him half the property now wouldn’t immediately allow him to claim the exclusion without fulfilling this residency requirement, I don't believe.One thought would be to use a HELOC to pull just enough equity out of the current home and use it to buy a smaller home, or at least the down payment.

I noticed that the previous owner let them pay half the security deposit and the other half later, which is a red flag.

You should track your own units expenses as well so when you move out, you can quickly reclaim any expenses or depreciation you built on the personal unit when converted into a 2nd business unit which would then be included on your schedule E.You also write off half of your property taxes, insurance, HOA dues, or any shared expense.

If this franchise has half a brain, they are going to sell the same package to at least ten other people in Memphis.

Warehouse space for the win....right now....just wait until AI machines are efficient and need half the space.

I'd guess half of this final third eventually sold, even if several years later. 

Quote from @David Robert: I recently became aware of a very cheap property (roughly half of after repair value) and upon looking at it in person I found out why it was so cheap: there is severe cigarette damage throughout the 1st floor (basement less so, but not entirely without damage); there is visible dripping tar on every wall and the smell is awful.

Live in one half, rent out the other.

We could get by on using about half of it if we had to. 

Spend more than half of your total working hours in an RE business in which you materially participate.2.