They are now requesting an addendum stating that each person is responsible for their own rent, and payments are not mutually exclusive. 

Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim.

adults=1&am...

For example, I mention that every adult must pay a $30 application fee, pass my credit/criminal background, make a combined income of 3x the rent, and whether or not the property accepts pets.

It is possible to apply both the primary residence exclusion and sec 1031. 

My parents struggled really hard (and still do) financially so my sister and I are trying to really break out of that mold as adults. 

Living rent free (again not assuming that is your situation, but guessing many parents with adult children at home don't charge them rent), it can be easy to spend that money and then when you are on your own, having problems budgeting.

In the ideal scenario, we picture keeping the property as a cash flowing asset forever and letting our kids deal with it after we die.BUT, if that doesn't happen, and we decide to sell in 7 years or 10 years, I'm going to kick myself for losing out on the capital gains tax exclusion of $500k.  

For example, I mention that every adult must pay a $30 application fee, pass my credit/criminal background, make a combined income of 3x the rent, and whether or not the property accepts pets.

I understand that the Section 121 Exclusion for Primary Residence allows you to sell your Primary residence and not have to pay ANY capital gains taxes on the gains/proceeds - as long as you use those funds to purchase your next Primary residence.What I cannot seem to find the answer to is - what is the maximum timeline allowed from Sale of the first Primary to Purchase of the replacement Primary residence?