Reverse 1031 exchange into a primary residence

[Roy Mitle]

We have rental property (H1), primary residence (H2) and plan to upgrade to a new primary residence (H3). 

We want to sell H1 to get some down payment for H3. Once H3 is closed, we will move into H3 and rent out H2. 

We bought H1 in 2015 at say 500K. We can sell it for 800K. Depreciation etc. over the years ~90K.

FAQs

We do not want to sell H2 due to emotional reasons.

We are doing reverse 1031 because finding H3 is going to be difficult. Market is hot (sf bay area). So we'd rather find H3 first and then sell H1 even though it'll cause us hardships to come up with an initial downpayment. H3 is likely in the ~2-2.5M range.

A few questions:

q) If we do reverse 1031 exchange we will have to call H3 rental as well. I think the only harm is that we have to pay a slightly higher mortgage for sometime. And then after xx months, we can convert H3 into owner occupied and hopefully re-fi at a lower rate

b) When we sell H1, we don't pay tax on the 800-500-90. Do we ever have to pay tax on this. H3 will be classified as owner occupied after xx months. 

c) Any pitfalls we are not aware of?