I disagree with the assessment that Option #2 “doesn’t get rid of anything”.
A 1031 exchange could significantly reduce your downside risk. You could consider 1031 exchange into a less bubble-icious region. San Diego is significantly over-priced compared to say, Kansas City or Nashville.
Option 3 is now out as well. When converting back from rental to owner occupied, you must live there a full 5 yrs to get the write off. 2 of the most recent 5 only goes for owner occupied converted to rental.
I thought you had to OWN the property for 5 years in the case of converting back to rental use. Can you point to the IRS guidance that says you have to OCCUPY it as a personal residence for 5 years. I read Pub 523 for Tax year 2006 and didn’t see the 5-year personal use for the case of converting rental back to residence addressed.
