You need to list all assets (including real estate) describing their value and identifying any secured claims against those assets. If it turns out that your property is worth less than what you owe the schedules will show as such. Since you mention that you "want to have exemption value for other properties" please note that California's homestead exemption only applies to your residence.
This answer is NOT intended to create an attorney/client relationship and is for informational purposes only. I concur with the attorney from Houston in that you should seek the advice of a bankruptcy lawyer. If you get this wrong it can have significant consequences.
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You choose which set of exemptions to use ... 703 or 704 - you cannot mix and match. You list your property on your schedules and exempt the property you want to keep/protect on Schedule C. No process. Just list the exemption next to the property on Schedule C that supports your exemption. Again do not mix and match. If you choose 703 set #1 as I call them, you cannot cherry pick from 704, and vice versa. Good luck.
I'm guessing by "#2 exemption" you're talking about Section 703's exemptions. 703 is the most exemption-friendly scheme, and gives you what is called the "wildcard" exemption, which is basically $24,000 to throw at any property which doesn't have it's own exemption code already. The condensed explanation is that, in order to use 703, you're house has to have no more than 24-ish-K in equity. You take the 24k "wildcard," use whatever you need to in order to exempt the equity in your home, and whatever is left over you can just go hog-wild with. In your case, since there is no equity in the home, you'd get the full 24-ish-K of exemption to use on whatever.
To the second question, yes. You list every asset. /EVERY/ asset. What you'll do with the house is list the home's value, then the value of all the liens against it. I'd recommend finding an attorney to help you out with the paperwork, but that's your answer in a nutshell.