Living in a reno while the kitchen is unusable while doing the flip yourself will test a any marriage, especially newly married people.

@Nishan Akwalia The most important factor is actually who the tax payer is for the property.

A 1031 exchange is NOT available for owner occupied property so that’s the bad news.The good news is for owner occupied primary residences, for married couples, the first $500,000 of pain is tax free.No need to worry about a 1031, live in the house, sell it, use the $500,000 exclusion and you pay KP tax on whatever profit may exist,2.

If married you can exclude $250,000 each in capital gains if your primary residence.  

They're spending tax-payer money, so they'll cut a check without batting an eye.Document condition before and after with photos, inspect regularly, and you should be fine.

3) Are you single, married, or about to be married?

Of course I would recommend talking to a qualified realtor but I'm married to the biggest realtor the smokies have ever seen so I'm biased.

Since you have lived in the property for two out of the previous five years you could take the first $500k of the gain tax free (as a married couple).

I'm ASSUMING (a bad idea, I know) that they were a married couple and had joint ownership. 

I’m in a different situation with no kids and not married but I would still urge you to find a way to pay off CC debt.