Since you're living in it, the worst case scenario is paying the full mortgage which hopefully you would be able to do anyway. 

However, you can use a cost segregation study to break the property into different class lives and claim more depreciation up front.

I would go with your gut on which home you would rather live in.

I live 100% from the income from our holdings. 

I originally lived in the casita while I rented the front home out.

Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500.

What I've found so far is the property has to be self-managed for the first year and you either need to live in it 14 days or 10% of total days it was available to rent, whichever is greater. 

Obviously you’d never sell until you’ve lived there 2 years, that’s a 5 figure mistake. 

I live in Oregon.To summarize:1.

When they sell an expensive property, they have money left over to bid up properties in Arizona and live in much larger and nicer houses in better neighborhoods.Anybody who already has properties in Arizona has done quite nicely.