My primary goals is to create some passive income through rental properties, either single or multi family homes, to start building wealth to secure my financial future and stop working full time to have more time to pursue my passions and enjoy life with family and friends. 

As far as end game goes, I would like to scale my assets to pull in more passive income by leveraging what I have into more and higher cash flow properties.

If we decide to sell after a few years in the event that the landlord situation does not go well, I am apprehensive about the capital gains tax (since I am unlikely to want to do a 1031 conversion to another investment property). 

@Logan LarochelleUltimately, everything you report on the return can be questioned by the IRS...will they...Your role is to report an accurate return based on the tax laws provided to us.If the IRS questions anything you should say you are excluding the gain via section 121.Show them the closing documents on the day you purchased the home and the closing documents when you sold the home.Then to show that you lived in the home for 2 years - show them the receipts of utilities that are in your name.Likely they won't audit you - but in the chance that they do - you should at least have the documentation.

I'm a contractor in my mid 40s and am looking to begin investing from a passive income perspective. 

My primary focus is to great passive income and too secure Financial freedom so I can enjoy the time I’m given with family and friends.My main focus is buy and hold rentals (single family, and multi units) but wouldn’t be opposed to a fix and flip or wholesale, I personally think having some of both helps with an exit strategy depending on the market.

And the good news is that the good honest tenants will be quite truthful, and as you verify the facts such an applicant provides you begin to gain confidence in them being decent.

So... (1) Since I lived in the property for two of the last five years am I exempt from all of the capital gains, or a quarter of the gains?

I started in real estate without very much in the way of money but I had a lot of time and was gaining knowledge quickly.

I'm sure there are many "what if" scenarios we are unaware of, and hoping to gain as much insight as possible.