However, they will not receive any tax deferral through a 1031 exchange unless they buy one or more of the identified properties on their list. 

And you did this without paying any tax.

To get the tax benefits of a live in flip you would have to live there for two years. 

They own the house, they're responsible, they choose the house, the tenant, responsible for taxes and insurance and loan payments. 

Just make sure to familiarize yourself with how Texas taxes work. 

After two years I understand for tax purposes I sell it as a rental.

Our mortgage payments started at $2300, but due to increasing property taxes and insurance, they have alarmingly risen to just under $3300.

Now you have a brand new property that has no mortgage, rents for $2,000 a month with $300 a month in taxes, insurance ect…profit $1,700 a month.

Im in NJ, but not sure it's the right market for me due to very high taxes and cost of houses. 

In your case you have a lot of losses in the time you own the property but these losses transfer through to your personal tax return, so you can recover some of it and not have to count the full nominal amount.