Is the basement legally considered living space?

Your primary residence - if you've lived in it for 2 out of the 5 years prior to selling you'll get the $250K/$500K tax free iike @Clint Galliano said. 

If you are not planning to live in the property, then you are not going to qualify for an FHA loan.

My sister and I have done all the leg work in finding where the 2 individuals lived at. 

Quote from @Kornelius Friske: We have a STR located in peoria AZ. it's 6 beds (garage conversion) and about 3900 sq ft in total. our energy bill last month was $450 and has been hovering in the $350-$450 range since we went live in august.

You'll need a contact who lives in Philadelphia for a rental license now to put down their contact info for the city.

I grew up near San Francisco and moved to Reno, NV to live and house hack. 

I'd recommend house-hacking a duplex or triplex if possible to help limit your living expenses.

I live in Upstate New York but i was thinking of areas more out west or down south.

When you live in that duplex for 2 years and then sell you'll be able to take 50% of the profit tax free (the allocation for the side you lived in).