If he does that he will defer all tax.When you go to sell that property you will be selling your primary residence and your gain will be tax free. 

@Matt Said - is this your primary residence?

He resides 3 hours away, not in the property.

Then, when they enroll in the local schools, I had to sign an affidavit certifying they are tenants, on the lease, and furthermore I'm responsible for fines, and reimburse the town for money spent on educating an illegal resident.

I keep reading and can not figure out a clear solution that keeps me covered legally.

Since this is your primary residence there are no taxes on the sale up to 250K I believe.

I'm from Laredo, Texas, but my family and I are currently living in South America and will be residing outside of the U.S. for the next 3+ years.

We were ok not cash flowing because we knew we were in an A class neighborhood and the profits would come from appreciation. 2.5 years after the acquisition, we sold the building and realized a 22% appreciation (definitely atypical results)In my opinion, if you're going to reside in the building, buy a 2-4plex in a neighborhood where you want to live and the appreciation will come. 

Resident Demographics. 

You qualify for the exclusion now (residing in it 2 of the last 5 years), But you will get a prorata share of the exclusion either way.