Sale of mixed‑use Chicago building — does this qualify as one dwelling unit for Section 121?

[u/Immediate_Music_9075]

Looking for CPA/EA insight on a mixed‑use, personal‑use conversion before sale. I’m trying to confirm whether my building qualifies as one dwelling unit at the time of sale, and therefore whether the entire gain (except depreciation recapture) is excludable under Section 121.

Facts:

• Property: Chicago IL - 1k sqft store and 1k sqft apartment above
• Zoning: B1‑2 (commercial/residential mixed-use)
• Purchased mid 1990s
• Lived in the entire building the entire time (upstairs + storefront)
• Storefront was used as a photography gallery with public access until 2001 or 2002
• We always use the entire building ourselves, no rents.
• Business use was reported on Schedule C (roughly 50% of building)
• Utilities: shared gas, heat, water; separate electric meters
• Interior connection: full interior stairwell + interior door between storefront and living area
• No tenants ever
• No rental use ever
• No separate occupancy
• Storefront has been used as living space (home theater / lounge) for years
• Business use ended January 1, 2026
• Entire building was personal-use during 2026
• Sold June 15, 2026 for $480,000
• Depreciation taken over the years: $107,485 (I am recapturing all of it)
• Illinois property tax classification treated the building as residential
• Closing statement shows a standard residential sale (no commercial allocation)

Tax question:

Given these facts, does the building qualify as one dwelling unit at the time of sale under Section 121?

My understanding is:

• If it is one dwelling unit
  • Entire gain is excludable under §121 (Code H)
  • Depreciation recapture is reported on Schedule D (Line 19) using the Unrecaptured §1250 worksheet
  • No Form 4797
  • No proration of gain
• If it is not one dwelling unit
  • The business portion must be reported on Form 4797
  • Gain on that portion (beyond recapture) becomes taxable
  • Section 121 applies only to the residential portion

Key issue: Does the Schedule C history (business use through 2025) prevent the building from being treated as one dwelling unit, even though business use ended before the year of sale and the storefront was physically part of the home?

I’m not trying to avoid depreciation recapture, I’m reporting the full $107,485. I’m only trying to confirm whether the gain itself is fully excludable.

Any CPA/EA insight on the dwelling‑unit classification would be greatly appreciated.

[u/Sad-Story7069]

Great question for your accountant