I have rent increases annually at 7% a year to get to market rate by year 4.

Can you imagine, an 8+% rent increase for sales tax? 

The first in Santa Rosa have created an increasingly large housing shortage, providing opportunity to developers. 

Even in a tough market, there are deals to be had if you are consistent, and work hard to uncover them!

I have a great tenant in there (going on 3 years with slight rental increases every year). 

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? 

The mortgage has passed through several lenders and is now with Shell point mortgage, the homeowner wants to keep the house with some help from the mortgage company, monthly payment used to be around $1100 and now all of a sudden the lender has increased the mortgage to over $2000.

Why should the government increase my taxes to pay for care for your parents?

What does that plan consist of? 

You will more than likely make your money back but I would not count it as a profit increasing expense like adding a bathroom would be.