How would this be accounted for for general accounting and taxes?  

Note I strive to minimize cash flow because it gets taxed versus other RE return are easy to defer or avoid the taxes.  

Secondly, the homeowner would need to cooperate as she would need to submit a bunch of paperwork including income statements, tax returns, etc. for the Short Sale application to show that she is insolvent.  

The interest would be tax deductible due to interest tracing rules. 

Hi Ricky,Being in operation for 10 years with mid seven figures of assets and NNN leases,it would be wise to speak with your tax advisor regarding if the tax set up should be an LLC, an S-Corp  or a C-Corp.It would also be wise to speak with an asset protection attorney to find out if this is something that might be beneficial to you in that area.

This might make sense, but again, you are just deferring the taxes and now pushing tax from capital gains to ordinary income. 

@William TaylorMichigan has some of the most complicated property taxes in the USA.

It's a balance of cashflow and wealth accumulation.One of the goals is to have tenants pay as much of your cost-of-ownership as possible (loans, taxes, insurance, etc.)In high-cost areas, any Class A or B property you buy will usually negative cashflow for the first 3-5 years, until rents rise enough to cover the negative cashflow + rising taxes & insurance.Investing OOS increases your risks because you may not know the market and you can't check on everything/everyone all the time.If you move forward with your buddies, HIGHLY recommend creating a solid Partnership Agreement!

They remit the taxes.

You are looking at the rent of $2,000 and mortgage (Loan, Insurance, and Taxes) of $18000 and thinking you have $200 cash-flow.