I don't know if this is going to help or not, but here are a few thoughts:


It is not just "no business use in the year of sale", it is "no business use in the year of sale" AND the 2 year rule was met.


Regulation 1.121-1(e)(4), Example #4 shows that converting a non-residence to part of the residence (and meets the 2 year rule) would make it able to be included as part of the 121 exclusion.

https://www.law.cornell.edu/cfr/text/26/1.121-1#e


1.121-1(b)(3) deals with vacant land that is part of the residence.


As a side note, when they revised Publication 523 a few years ago, it became useless and filled with errors. Use the 2013 version.
https://www.irs.gov/pub/irs-prior/p523--2013.pdf