However, my additional concern is whether this would mean there is capital gain tax as well.

Are you paying the sales tax as the purchaser, like you would if you were purchasing a car?

You also should not forget about paying NJ Income tax as well.

Regardless, the 1031 allows you to defer that tax as well, rolling the adjusted basis of this property into the basis of your replacement property. 

you can sell the one you lived in and pay no tax.. as it was owner occ that's appealing. other wise its really personal decision and you will get 17 different opinions on what to do on this site that's for sure. :)ya we sure hate that gambling for appreciation.. but some folks have to live with it.. good job.

@Stephen Valder,Your  solution makes a lot of sense, but in the case you mentioned, you likely had to declare gift tax, as the amount gifted looks more than the annual exclusion allowance. 

Not sure if a bankruptcy would change the parameters or not but that may be a better option for the seller. yes if the bank reports the debt as forgiven.. there is an IRS form though you can file with your tax's that says your broke.. then you don't own the tax's on the forgiven amount.. during the crisis IRS postponed this so no one got that treatment but that sunset and now short sales or debt forgiveness needs to be calculated …. the forgiven debt is tax as ordinary income so a 1 mil forgiveness could be a 300 to 400k tax bill..

Personally, I would like to legally avoid as much tax as possible.

You sell investment real estate and then buy investment real estate paying attention to some rules in the middle and you do not have to pay the tax as long as you own the next property or as long as when you later sell the next property you again do a 1031.

Nevada is also a no income tax state but yes you will still owe California tax as long as you live there.