Can I sell it and get an exemption to the capital gains tax of occupying the primary residence 2 of the last 5 years?

We expect to get about $150k out of the property when we sell.Do we take the cap gains hit, pay off the mortgage on the second rental ($80k) to increase cash flow on that property and do something else with the remainder (pay down our mortgage, invest, etc.)orDo we 1031 exchange into something else? 

Someone said something about Capital Gaines Tax in NJ?

This will benefit you in multiple ways.  1.

It does require self-employment activity, but has a lot of advantages: Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.There is no custodial requirement for the 401k.You don't need the additional expense and administration of an LLC to have checkbook control.There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.A spouse can also participate in the same Solo 401k plan.The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)

I wouldn't do it unless there is a benefit to you, IE tenants are getting $300 bills in a 800sqft apt and will move out because of it...It isn't something I've ever really looked for when purchasing a property, and I don't see the benefit of spending $800.

It's a little frustrating that they paid all their lives to support others on medicaid and other government programs and now they cannot reap any benefit themselves unless they lose virtually everything they have.Any thoughts?

@Brian Erickson The main benefit of having a license is access to the MLS for the purpose of doing comps (comparable sales).

A benefit of a USDA loan is that it has lower credit requirements, and it offers 100% financing, but there are income limits. and if you find a house in a USDA eligible area, you're going to seriously limit your market for rent and/or resale due to low population.

You should learn about the different advantages for real estate investing (loan paydown, appreciation, tax benefits, cash flow).