No 2 is exactly right.

The only thing is

This rule only applies if the taxpayer's second main residence was the taxpayer's main residence for a continuous period of at least three months in the 12 months before it was disposed of and it was not used for income-producing purposes in any part of that 12-month period when it was not the taxpayer's main residence.

So she had to live in that campsie property for at least 3 months and can't rent it out for the rest of 3 months.