.-- I don't believe my buying out the siblings raises the cost basis since, as I understand, the house stays in the same taxation position as the person who is "gifting" the duplex.

If you are not making a lot on the rent then that depreciation deduction would end up with you showing a loss on paper that could potentially shelter some of your other income from taxation.

As you pointed out in your blog post, http://realheartland.wordpress.com/2014/03/05/out-of-state-taxation/ the answer seems to always be "it depends".

I am currently working on finding a way to shelter funds from taxation.

Account ClosedYou are allowed to withdraw up to $10,000 to be used for the first time home purchase.Contributions into Roth IRA have already been taxed, therefore those can be taken out without taxes or penalties, the earnings in the Roth IRA however would be subject to penalties and taxation if you take early distribution.I believe you can buy multi-unit, as long as you buy it as owner-occupied, and yes, you can use FHA loan.

Once it becomes necessary to adopt S-Corp taxation, you simply file IRS Form 2553, and VOILA!

This would be a violation of IRS rules.You can invest in real estate, including flip transactions with IRA or 401k funds, but must think more like a fund manager than a guy with a hammer.Keep in mind, flipping is a business activity and as such incurs UBTI taxation within a retirement plan.  

In reading thorugh some of the other posts its seems as if i should NOT be paying cap gains tax at all?

With my background in Taxation, I have knowledge of tax laws that could be helpful when it comes to the capital gains tax when the project is completed.  

I feel this is adding another level of taxation that penalizes landlords...