Should i rent or sell or refinance a free and clear 2nd home

[Ethan Allen]

I sold my primary residence, cleared out my IRA and purchased a new home free and clear in California. I own free and clear a 2nd home in Modesto that my nephew is staying in.

So I just used up my 2 year no capital gain on my primary residence this year. Took all 500k out of my IRA, and am living on my social security income.

My 2nd home has gone up $200k in the 10 years i have owned it.  

It was just a home where i let my kids stay rent free until 2020 why my spouse died.  So it was never listed as an income property.

With my spouse's death, my son moved in with me and we sold the primary residence and  moved to the new place.

My daughter's son now lives in the Modesto house and pays all the expenses.

I want to eventually sell the Modesto house and buy something closer to my current home in Sacramento area and actually rent that to my nephew.

BUT (there is always a but) i may need to take money out of the Modesto house to pay the capital gains on closing my IRA to buy the new home free and clear.

At my age, keeping my primary home free and clear is an emotional necessity.  But I would like to know the tax implications on  1) selling it now,  2) renting it to my nephew at below market value and taking the rental deductions making it a business loss until i sell it.  3) just letting him stay there but pay ALL the expenses including property tax 4) doing a 1031 exchange for a $400k property near Sacramento.