Primary residence or rental: implications and advisement

[Kristofer Willis]

Hi, all, First post and was hoping to crowd-source some advisement re: to preparing taxes as I plan for next steps.  I'm definitely wet behind the ears re: real-estate investing wanted to listen to any tax advantages/disadvantages I may not be considering

... here goes:

Scenario:

Purchased house 1 (h1) as primary residence with a conventional loan ($90000) in Oct 2013.

Purchased house 2 (h2) as potential primary residence with cash ($85000) in Aug 2017. House needed renovation.

Completed renovation ($100000) of h2 with private loan in Aug 2018. All utilities are in my name.

Had some life issues, and decided to let a trusted friend move in h2 in Aug 2018.  They started paying me ($1300/mo) via PayPal. Market rent is $2200, and I saw myself helping them out. No legal rental contract was established. I intended to move-in Feb 2019, and I go by there at least three times per month to work on home projects.

Refinanced ($200000) h2 as primary residence in Feb 2019.

Life issues continued, and I was unable to move in h2.

With the refinancing capital, I paid off the mortgage on h1, and paid off the private loan funds used for the renovation of h2.

As of July 2020, the close friend is still living in h2, and I have decided not to move-in like originally planned.

In the next 12-24 months, I may sell h2 (recently appraised at $400,000) and purchase a larger home for about $500,000. This home will absolutely be my primary residence. I intend to keep h1 as a rental property.

My 2018 taxes listed h1 as my primary residence. h2 was not converted to a rental property.

The close, trusted friend listed h2 as their address on their 2018 and 2019 tax returns.

The Ask:

As I complete my 2019 tax return, should I:

1. convert h2 as a rental as of January 2019 and take depreciation/list rental income accordingly? I realize if I do this, I may have to pay capital gains if I sell h2 by 2022. Perhaps the 2-out-of-5-year rule would apply.
2. not convert h2 as a rental, and would I be OK to assume that h2 appears as my primary residence, which can save significant capital gains when it is sold by 2022?
3. do something I have not considered.

I am leaning toward #1 as it appears to be the most legitimate and risk-averse option. However, because my situation seems, to me, somewhat unique, and unexpected changes have occurred between 2018 and 2020, I just wanted to hear expert recommendations... and inquire about any tax advantages/disadvantages I may not be considering.

Note: I DO plan on connecting with a CPA tomorrow, but any and all perspectives are welcomed and appreciated. Thanks so much!