Simply gifting him half the property now wouldn’t immediately allow him to claim the exclusion without fulfilling this residency requirement, I don't believe.One thought would be to use a HELOC to pull just enough equity out of the current home and use it to buy a smaller home, or at least the down payment.

But my down payment 3 years ago is only 10% of the total price $42K.

How long have you owned these, and how much is rent vs the payment?

You should find out what percentage of the rent is being paid by S8 and by the tenant.Tenants have to sign the rent increase and some won't because they don't want their payment portion increasing.It's also highly unlikely a S8 office will approve the huge increase from $797 to $1300.- BTW: the $1300 includes all utilities being paid by the landlord.

Your payments are known. 

It will give you a lower interest rate on both properties because you bought them as owner occupants, and it will require less down payment to get into. 

When you said you had some money saved up, I was thinking that meant you would have enough for a down payment on an FHA loan.

If tenant below is paying 1,500/m he's living in area he wants for roughly 750/m P/I payment.

For example, the buyer, if they find problems with the property or stop making payments, can blow up the seller's credit.

But, the self-sufficiency test for FHA loans can be really difficult in SF, meaning that the market rent from units you will not occupy must be sufficient to pay for the mortgage payment.