DEAR BENNY: In addition to our primary residence, my husband and I own a commercial property that houses our business on the first floor and a residential apartment on the second floor. We currently rent out the apartment. The property is zoned commercial (C-4), dual use.

Before selling this property, is there any advantage to selling our primary residence and moving into the second-floor apartment for two years to establish residency? Since each floor is 1,250 square feet, would we then be exempt from paying capital gains taxes on that portion of the profit from the sale that represents the residence? And if so, in determining what portion is considered residential use, would the land that surrounds the building (approximately 4,000 square feet of concrete driveway/parking lot) be considered part of the commercial property although part of this area would be used for parking our personal vehicles as well as customer parking? --Pauline

DEAR PAULINE: Excellent suggestion. The law that allows homeowners to exclude up to $500,000 of gain is not a "once-in-a-lifetime" situation. It can be used over and over again. The only conditions are that the property must be owned and lived in two out of the five years before it is sold.

So, you can sell your current home and if you have owned and lived there for the requisite period of time, you can exclude up to $500,000 of your profit. In fact, if you have lived in that property for a long time, you can even move into the upstairs apartment now, so as to start the clock running on the second exclusion. However, be careful -- if you cannot sell your current house within the next three years, you will lose the right to exclude the profit.

And here's another suggestion: When you sell the second property, you have the right to do a 1031 "like-kind" exchange on the first-floor business, and at the same time take the exclusion for the upstairs apartment. This would mean, however, that you will have to be a landlord for at least one or two years on the replacement property that you obtain through the exchange. Talk with your financial advisers about this.

As for allocation of the parking area, I really don't know how the IRS would treat this. I suspect, however, that if you carefully allocate the square footage for your personal usage as compared to the business operation, that calculation would be acceptable.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.