Honda FR500 tiller fuel smell in oil

I don't believe you have a fuel pump so the fuel must be coming from the carb..
 
Leaving the fuel lever on after pulling the carb off (still assembled), hooked up to the fuel line will
show any leakage coming out of the throttle bore.  There should be none.
 
The float setting in general, with the carb upside down, should be parallel with the carb body. 
 
Another way to check for needle/seat leakage is a by hooking up a Mity vac (or other) brake bleeder / vacuum tool.  It's hooked up to the carb, (dry and off the engine).  With the carb upside down and the tool installed, you should be able to pull AND HOLD A VACUUM.   If it bleeds down, the seat/needle is leaking.  
 
Often, the seat orifice varnishes up causing sticking.  **A quick and easy fix is to use an ear cleaner.
Cut off one end, put some metal cleaner or tooth paste on the fluffy end.  Install in a drill motor and insert into the carb needle bore.  This will remove any and ALL varnish and the needle won't stick. You'll use several ear cleaners as a lot of crap will come out... 
 
If the needle or seat is damaged / worn, the above won't fix that...
 
Plz post back how it goes...

The Kei Hin BB carb seems in order. jets and passages clean. I left the gas on with the carb loosely mounted and no fuel leaked from carb throat. after cleaning I observed the float valve stopping the flow as soon as it reaches the valve seat (float parallel to bowl seal). 
In my mind the only other way fuel could mix with oil on this tiller would be blow-by from rings??
Is it possible a leaking head gasket could result in fuel oil mix? The engine does have oil leaking from around that height.

Tested compression (with slight head gasket leak) and it seems to be around 40psi.
I don't have a leakdown tester yet, but does this sound like the rings could be worn enough to mix fuel in oil? G200 engine. 
Head gasket coming, but it is difficult to find service manual that details the disassembly needed to replace rings. I see some time-lapse videos online from other countries, but no clear how-to.
They seem to rotate to TDC and then pull camshaft.
Then rotate to BDC and remove con-rod bolts, followed by pulling crankshaft, then push piston out.

I would really like to find detailed info but the service manuals online seem overpriced or sketchy online stuff that may not be helpful.

 The gasket is intact but flatten and very stiff.
Very carbon crusted piston and intake valve. Exhaust valve more white crusted.
Trying to figure how to attach pics
 
 

Decided to put head back on and do another compression test, a baseline one and a second with a bit of oil in plug hole.
However, instead of using the pull start I wrapped a long strap around flywheel and got 5 or 6 revs by pulling it, and the dry cylinder test showed factory spec 80-85 psi this time, so i reckon the rings are decent after all?

Just from oil seepage at the head, slow leak over time, took awhile to clean this machine.
Head gasket was pretty flat andstiff but more or less intact.
Took awhile but I got the mating surfaces and the piston, valves and chamber de-carbon-ed and clean.
Cylinder looked normal with plenty of cross-hatching visible.
85 psi compression.
Zero gas leaking from carb float valve or petcock.
I dont know what else I could check for the stated fuel-in-oil problem, so I assembled it and re-checked fuel and spark..   starts and runs fine. I tilled some earth for awhile and did not detect fuel in oil.
Sent it back to its home to see how it does the rest of the spring.
Time will tell