Confused on what to do with rental property

[Neil Hunter]

I have a home that I am renting out in central California. I owe about $160k, and its worth 290-300ish. Currently my cash flow, after all expenses, is about -$20. 

I've been weighing my options. Since I'm losing money, it seems like its a no brainer to sell.. right? I'm trying to think of reasons where selling would NOT be the better option. I could..

1) Refinance to a 15 yr fixed for about 4.3%, but that would actually increase my monthly payments (I've got 19 years left on my 30 year mortgage, currently in an ARM that has been going up and is currently at 5.125%). However, I'd save in total interest paid, but my cash flow would be even more negative.

2) Make an additional mortgage payment and pay off half of it. That would be a 5% guaranteed "return" by saving me on all the interest

3) Sell. Zillow is estimating my house to actually depreciate next year. But I don't want to pay the capital gains taxes. I suppose I could wait to sell, then take the gains and immediately use that towards the next house I live in (I can do that on a rental, right?), thus avoiding capital gains taxes.

I'm leaning towards option 2, and possibly combine it with option 1 (refinance and make extra mortgage payments).

I guess just conceptually.. if you're breaking even or have a slight negative cash flow, does that always mean trouble? I mean if you bought a house for $200,000, rented it out the entire time but broke even, your tenants still "paid" for the house, and you have a "free" house at the end of it, right? What am I not understanding correctly?