Let me try and clarify.
The exclusion is for homeowners who use the home as their primary residence. As long as you live in the home at least two years, you can exclude up to $250,000 or $500,000 of the gain. You are also allowed to rent the home for up to 3 years after you move out before you sell. If you rent longer than 3 years, you are treated as a landlord and not allowed to exclude any gain.
The qualified use rule was set up to prevent landlords avoiding capital gains tax by moving back into their own rental property for 2 years before selling. So periods of ownership before it was your residence are non-qualified. Also, moving out then moving back in creates a non-qualified period. If you rented for 8 years and moved back in for 2 years, then only 20% of your gain is qualified. But all the times you lived in the home as your personal home are qualified, so someone who rented for 1year, then lived there 4 years, then rented for 1 year, then lived there 4 years, would be able to exclude 80% of their gain. Qualified period include times when you move out before selling as long as you don't move back, and as long as you still meet the 2 year/5 year rule. So if you rented for 1 year, lived there 4, rented for 1, lived there 3, rented for 1, and sold, you would still have 8 qualified years of the 10 total.
This is unfortunately not spelled out in the current version of IRS publication 523 on selling your home. Pub 523 from 10 years ago did a better job if you can find it online. TurboTax does include the calculation but you may need to manually supply the number of non-qualified days of ownership.
In your case, you must first meet the 2 years in the last 5 year rule to qualify for any exclusion (which you do). Then, to figure out how much gain you can exclude, you must add up all your qualified and non-qualified use for the entire length of your ownership. If you owned the home for 1915 days and it was your residence for 732 days then you can exclude 38.2% of your gain (up to $250,000 or $500,000) and you will owe capital gains tax on 61.8% of your gain. The gain due to depreciation will be taxed at a flat 25% and the rest will be taxed at 15% (for most taxpayers).
If you were to live in the house for one more year, you could exclude 1097/2271 or 48% of your gain. Your qualified percent would increase the longer you lived there as your personal residence.
It's not just the first rental that creates the qualified/non-qualified use issue. Any period of rental that ends with you moving back is non-qualified, because it makes you look like a landlord/property investor. The only rental use that qualifies you for the exclusion is when you move out of your personal home and sell it within 3 years, because that makes you look like a homeowner who used a short rental period to manage their move better.
