Need Suggestion- Which is better choice

[Peter Charlie]

Hi

When I moved to more appropriate home, I rented my previous SFH which is 7 miles away.

Facts:
-The move happened on Jan 5 , 2013.
- I have 265K loan on that home with my net payments $1800pm (Tax+Mortgage+Insurance) and average maintenance of $150pm.
- The ARM (2.625%) on home resets in October 2016. The ARM was taken out when I occupied the home
- Current Rental income is $2500pm which is 10% below market as tenant is A+
- I claim 12K as depreciation on home on returns, after expenses I end up with very little taxable income
- Current market value of home is 820K and property was bought for 450K (+ 40K permitted upgrades)

Help Sought in sorting dilemma:

A. If I sell and close this fall, I will rake in profits tax free approx 300K as per tax laws, sale within 3years of primary residence. With equity in it, I will get 500K cash
B. If I keep home I will keep having rental income

In case I do -
A.I get 500K i can reduce mortgage on my current primary home which is jumbo - so it will become conforming and may be invest some money in tax managed balanced funds.
B. Rental Income helps pay college... increase over time, real estate appreciation....

Life /Financial Situation:
- Kids set to go to college in 2 years and 7 years ( => sponsor 8 year of university)
- Outside home equity I have 401(k), Emergency Fund to cover 1 year of expenses, and 529 to cover 1 year of college, and a tiny play brokerage account, paid up cars no loans.
- Risk averse
- Want to semi -retire early and use obamacare efficiently and some non stress job income to sail from 55 to 65. When I hit 55 kids will be almost done college.

Please suggest A or B...??