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If they exercised after 5 years, that would be a "gift" of $1,250/month over the first 5 years of their lease.

All contracts, options, or other devices not based upon a substantial consideration, or that are otherwise employed to permit an unlicensed person to sell, lease, or let real estate, the beneficial title to which has not, in good faith, passed to such party for a substantial consideration, are hereby declared void and ineffective in all cases, suits, or proceedings had or taken under this chapter; however, this section shall not apply to irrevocable gifts, to unconditional contracts to purchase, or to options based upon a substantial consideration actually paid and not subject to any agreements to return or right of return reserved.That appears to close the loophole. 

The lender I am trying to go through is telling me I will need 25 percent down, 6 months reserves on both properties and can not receive a gift of any amount for the second property.

Would asking them to send a $1 Amazon Gift card be ok?

I need advice on the best way to get the equity without getting killed in taxes.I have thought getting a loan for the remaining amount that I owe them, but with me not owning it for two years, I'd have to pay capital gains tax when I sell it.The other option is for my parents to sell it and then give me the equity, but they would have to pay a gift tax.  

How much do you have to send them to get this "gift"?

Either try to generate her leads or write her a check directly or get a her an Visa/AmEx gift card for a few hundred bucks.  

What if he "gifted" the money to me and I took the loan out myself?

The only problem you may run into is having enough funds for down payment/closing costs, so a co-borrower may be required and/or you can obtain gift funds.Another possible solution would be to go FHA route and find a fourplex.