I never regretted keeping my first house as a rental because it cash flowed very well from the beginning and as years passed and rent increased it became an outstanding decision .However, our home was significantly less expensive than yours.

My understanding is the only way to truly avoid capital gains tax is to pass on the property to a beneficiary through a trust.

If the property being Class C is outside of your wheelhouse and you're not ready to commit to the work and risks required to own and manage a class C property, and your only drawn to it by getting a big seller financed note, I would pass and look elsewhere. 

.- Assuming you can pass the FHA self sufficiency test (very hard now with rates where they are, the new 5% down programs are probably a better option) you would have send a letter to your lender stating you would live in one of the units that makes up the zoning certification (legal units) for the building.

I inherited my father's home and am entertaining someone who has cash offer for the house.

DM and I can pass the info.

If you're interested DM me and I can pass that info along.

Just wanted to add that your plan sounds great, but the state is not entertaining counter offers at the moment.

If they passed new laws and in NY especially talk to an attorney.  

Because no HML will pass an opportunity to profit from a good deal.