<a rel="nofollow" target="_blank" href="
https://www.law.cornell.edu/uscode/text/26/121">https://www.law.cornell.edu/uscode/text/26/121</a>
(C) Period of nonqualified useFor purposes of this paragraph—
(i) In general
The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
(ii) Exceptions The term “period of nonqualified use” does not include—
(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,
(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and
(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.
Let me call out section (C)(ii)(I)
"The term “period of nonqualified use” does not include...any portion of the 5-year period described in subsection (a) which is AFTER the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,"
So ANY period of non-use is non-use, EXCEPT for periods that occur AFTER THE LAST DATE the property is used.
So let's consider.
Bought on 1/1/14
Rented on 1/1/16 (2 years of qualified use)
Sell on 1/1/18 (these 2 years fall under the exception in (C)(ii)(I) , so it is considered qualified use and all gain is excludable)
Bought on 1/1/14
Rented on 1/1/15
Convert back to residence on 1/1/16
Sell on 1/1/17
The homeowner has 2 total years of qualified use, which, although not in a single block, still satisfies section (a). But the period of time from 1/1/15 to 1/1/16 when it was rented is non-qualified use. It does NOT fall under the exception granted in (C)(ii)(I), because it is not AFTER THE LAST DATE the property was used as a principle residence.
The section you selected describes that the 2 year rule can be satisfied in aggregate rather than a single block of time. That is IRC 121(a). But you are ignoring that the limitations in IRC 121(b) have an entirely separate set of rules, of which 121(b)(5)(C)(ii)(I) is but one.
