So, I think these finer points probably vary from state to state but overall its exactly as you described.

They are a great option for situations like the one you described. 

Hey Jason, nice to meet you.With the financials that you described, I don’t think that you need to sell your house and get into a duplex unless you guys want to move.

In my experience, 99% of the time you’re not jumping through the hoops as described below.

What you described is House-hacking.  

While not in TN specifically, I have assisted clients do as you have described: live in a property as a principal residence for 2 years, rent it out for 3 years, then sell.Based on the situation described, you would appear to be eligible for the MFJ joint exclusion on principle residence on your 90% share.However, in order to retain that ability, the house will very likely need to be sold (ie, sale closed, not just under contract) by the end of this month. 

What you are describing is a fully thought out partnership or pre-arranged circumstance.

If you are good at managing a budget I think this is fine.I agree, especially somewhere that is barely habitable those other 6 months, which describes the UP of Michigan quite well.

I totally agree with you that the older ones often have the profit potential in the ways you described. 

Account ClosedI wouldn't use cap rates for the type of deal you're describing, a small multifamily.