While your statements about being able to exclude gain on sale of home is generally correct, there are a few things you need to be aware of.
First, when you convert a rental / income property to personal use, your basis in the property remains as acquisition cost plus cost of any improvements, however your adjusted basis ( used for computing gain/loss on disposition ) is basis less accumulated depreciation. This has the effect of increasing your gain.
Second, that depreciation that you were allowed ( whether taken or not ), also needs to be recaptured -- this means that of the total gain as computed above, and amount equal to the accumulated depreciation will be treated as ordinary gain i.e taxed at your marginal rate. The rest of the gain is either taxed at capital gain rate or is eligible for exclusion.
When move from the first rental property to the next one the same thing happens again, as long as two years have passed since the last closing.
Yes, this means there is some hit but in general you can exclude a lot of the gain.
Hope this helps
