So it sounds like I likely have 2 options:1) just sell the property and eat the Cap Gains tax and move on, or2) do the entire exchange under our personal names and do a “improvement exchange” and book it through the home build.

As well as if it is smart to even have this as a back up plan In most places tax liens go right to the front of the line so there's no real risk to the state/local government and thus no reason to sell them for pennies on the dollar, as they usually can collect everything just by foreclosing.

My question is, should I sell it now and make $500k+ to reinvest in multiple other properties or wait the unknown amount of time for the property to be sub-dividable and potentially make 3-4x?

@Kim LeJeuneIf you lived there and sell shortly after (within 3 years), you may not owe capital gain tax.When you ask about the form, it sounds like you intend to wrestle with forms.

Here are 15 undeniable reasons why it might be time to sell your investment property:Market Peak: If the real estate market has hit a peak, it might be the best time to cash in on your investment.

If you already own it and it was a personal residence that you don't want to sell providing you live somewhere in the area, have an interest and understanding of your local rental laws and aren't in California (the laws) or Florida (the possibility of assessments) then self management is a possibility. 

Additionally feel free to send me a DM once you identify a property and we can crunch some numbers. 

Hello,I'm interested in selling my 12-unit building in Chicago but I would like to sell it on my own.

I think it would be a great house hacking plan for you.As far as your exit plan goes, selling a property with an ADU isn't always straightforward.  

Or should I even just cut my losses and sell.