If they pay, I would not even care about the first claim? 

I usually only recommend those communities if the owner gets a lot of personal use at the property and wants to have the rest pretty much pay for itself, but not as a cash flow investment.Best of luck!

What I mean is, it looks like as a married couple filing jointly we pay $0 in cap gains on first $94k, so could we use a strategy to pull out $94k in cap gains then 1031 the rest?

Overall, I expected to pay no capital gains tax seeing as how we lived in the house 4 years out of the +5 years I owned it.

I owe $345,000. after paying the mortgage and all utilities I would cash flow $500/month. 

@Michell ChaseEvery state you own property in you need to register as you will eventually have to pay state taxes as well

I want to pay that debt off and  renovate the houses.

Pay Dirt Flips is her new business!

The state is Florida.I did not consider this first mortgage an issue because I was simply going to live rent and mortgage free in this property myself, rent bedrooms, make good money and recoup my investment in short time (netting 4k income per month if you count not having to pay my current rent).

The extra fees for every little thing are a huge turn-off - $35/day for heated pool and be notified a week in advance OR pay another fee - no thanks. $75 for propane usage - I can go buy a small grill and tank for less than that - again no thanks.