Knowing the Fort Collins market and it's price points a little bit, it doesn't sound like you're capitalized quite enough to get started flipping, especially when factoring in risk (properties in the $300-400k range will be high risk, not good locations).

Even then, if you've built up enough carry-forward losses, a nice capital gain may not trigger any taxes to be paid. 

Average maintenance and capital improvement: 350/month (4-5kyr).

I think you need to sign up on Meet Up and RSVP: Tuesday, Nov. 12 Walnut Creek  at Rotator Taproom 6pm (short notice - it's tomorrow)Thursday, Nov. 21 Oakland at Two Pitchers Brewing Company (hosted by Tyler Jahnke of Kenji Capital)Saturday, Nov. 23 Tilden Nature Area, Berkeley hike at 10am (hosted by Tyler Jahnke of Kenji Capital)Thursday Nov. 14 San Francisco - Happy Hour/Networking at Alchemist Bar and LoungeTuesday, Nov 19   San Francisco - 100% Funding for your Deal (Sports Basement at Stonestown Galleria mall)https://www.meetup.com/bayarearei/events/304151177

Don't put all of your capital into one asset class.

When I die, they can keep renting out the properties or move into the SFH, or take the step up basis and sell it with not as high of a capital gains tax hit (I hope they wouldn't choose the 3rd option).

From this CT information, it looks like it is an offset against your capital gains from other property, so you would have to find investors with significant capital gains and/or have them yourself. 

If you put enough down you can make it break even, but it just comes down to how much capital you have and how creative you want to get to make a deal work.

I believe you were right he would inherit your cost basis, so he would owe capital gains.

Excellent insight showing just how ridiculous this “don’t need capital, just drive for dollars” nonsense is.