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Interesting question for a tax lawyer. If you think they qualify, would they be able to take the entire $500K exclusion on each sale? Or should they get only a combined $500K exclusion on the two sales? Both may run into the problem that the exclusion is not allowed for any sale if the exclusion was taken on a sale within the previous two years. Of course, they could have made a single sale to a third party, who then sold the two units separately. Since they didn't, I don't know the answer.

Yes, You enter them as expense then amortize the balance. I think the instructions say enter them in the expense they go to IE: office supplies, advertising. etc.

I have entered the start up costs as an 'other expense' and then amortized the amount that exceeds the $5,000.

Have you tried entering the IRC section in the box just above the serial number area? Or possibly there is a different entry required for "method" and "convention"? Sorry, no longer use ATX so just guessing it is something simple on that screen.

I don't see why not if they pass the residency tests and never used it as a rental.