It will be taxed as ordinary income with self employment to boot.

I know it is impossible to get 10% capital appreciation in future years, but I think 4 or 5% might be realistic.I think one of the advantages of this split is that rent would be taxed at ordinary income rates, so having a chunk of the return in capital appreciation defers the tax.

Nothing you described sounds out of the ordinary.

Either one pays no taxes at the entity level and the income passes through to the owners to be taxed as ordinary income.Employment taxes only apply if you pay W2 wages to someone (employee or yourself), and short term capital gains are the same as ordinary income.Probably best to go meet with a CPA and they will help steer you in the right direction.Good luck!

@Chanakya J.You can deduct anything that was ordinary, necessary and reasonable to conduct your business.If you have a PM, you likely received monthly PM statements indicating what expenses that the PM paid on your behalf.You would then add any expenses that you paid for out of pocket.Home owners insurance, mortgage interest, taxes, repairs are just a short list of the eligible expenses that you are entitled to deduct.

The 7k issue here is nothing compared to ordinary vs capital gain planning. 

Nothing out of the ordinary here.

When the Tenant moves out, do the same thing and compare the two to see what is "ordinary wear and tear" and what is chargeable damage.

Even if you somehow do manage to pay cap gains, you're doing so at some 50% of the tax rate ordinary taxpayers pay...

Time spent reading biggerpockets, browsing the MLS, crunching numbers on potential properties, watching RE videos on YouTube...those are not rental real estate trade or business hours.Hours spent bookkeeping for the rental, interfacing with your PM, interfacing with contractors, interfacing with tenants, etc are generally ordinary and necessary rental real estate trade or business functions.Income tax law is complex.