Investment vs Primary Residence Financing and 121 Exclusion

[Jim Mac]

Hello,  great forum- thanks in advance for your reply.   I have two homes in two different cities California.  One is a second home where I have someone renting a room.  I also have my present primary residence.   I am in the middle of securing financing to fix up the second home for sale.  I need to decide on the type of financing.   The plan would be to move into the second home to work on it.     Ideally I would stay in it for two years to qualify for the $250,000  deduction on Capital Gains also while doing this.   The core of my question here is toward financing.   If  I   use rental financing (accepting the higher rate)  and then declare it as primary residence for  the 121  exclusion is that an issue- re the loan and potentially the case for the  121 with the IRS>    If i  refi my present home to gain the funds  then  there is the issue of jumping to the secondary residence and trying to declare as my  primary re: the loan?  Thirdly , the option trying to declare the secondary home as my primary residence for the purposes of the loan.  However my work income is in the town of my Primary residence.   I want to fully disclose what my intents are to the Mortgage broker.  This is quite a tangle of options-   The investment property Loan on the secondary home seems the best right now if there is not an issue with then going ahead and trying to claim it as a primary residence for 121 Exclusion on Cap. Gains    Thanks in advance for your help.