Depending on the loan amount for the new property, roughly a little over half of the gain could be deferred through the exchange.Without a 1031, they’ll face taxes on the entire gain, including federal capital gains tax (likely 15% based on their income), California state tax, and depreciation recapture, potentially totaling $130-150K.

So when the bank requires insurance for the loan amount.. that will work generally.. 

The problem is that the new lender will not allow me to quit claim the property back to my LLC now that the loan is done.So I have to rely on insurance only which is terrifying to me.

You would need to let them know you are 2nd lender and want to pay the loan off.

A lot of the owner occupy loans require you to live there for at least a year, so it's not forever. 

FHA loan through my mortgage broker associates.

I would get an attorney or title company involved to create your loan documents to ensure they comply with the law and cover all the aspects you need.Another method that is likely your best bet to take on investors is to create a joint venture (JV).

And your point about a lingering HM loan makes sense.

Doing a 75% 1st mortgage and 15% heloc or heloan would likely give you better cost of funds all around.If this is an investment property, you can do 80% cash out refi using NonQM loans such as DSCR loans, but at a higher cost/rate than if you stick with 75% loan to value. 

Make sure you talk to a Banker or Loan officer that is well versed in both SE (Self Employed) income and also Non/QM programs.One tip I will give you as a Banker is open up a "Business Checking account" and for the next 12 months pay "Everything" out of that account.