As you said, they have Nonqualified Use, so roughly 35% of the profit can't be excluded (plus the gain due to depreciation).

I had said "maybe" because if the all of the rental period was at the end of the ownership, there would not have been Nonqualified Use.  But making it their Principal Residence AFTER the rental is what triggered the Nonqualified Use.

If the was truly mixed use, meaning part of the home was used for rental or business while the taxpayer was also residing there, then the business/rental portion would have qualified for a 1031 Exchange if the new home was mixed, or purely business or rental.

If I remember correctly, the new home being used for business/rental for 2 years may only be a Safe Harbor.  I have in the back of my mind there have been some isolated ruling that MIGHT allow only one year, and possibly even less if there could be substantiation of the intent to have it business/rental longer.