If I take over this loan through a subto purchase, does the tax exemption remain in place or would I have to start paying taxes?

The tenets are paying off the remaining mortgage via rent payments.

Yes the leaseback will cover the loan and fees for the duration…if we don’t break even, we may have a tiny cash flow.the builder is using it as a model until they sell the remaining units they will build over the next couple years.

I do need to cover the remaining $9,000 out of pocket (I am in a similar spot, billed monthly and the leak started soon after the last reading)The company does offer a payment plan, but, since the bill in in the tenant's name he would have to go on the plan and I would need to figure a way to pay him monthly. 

The difficulty of owning, keeping, maintaining and having your head above water is why those aforementioned types remain predatory & are fully in front of this.In regards to what you said above, you clearly state your desires.

Do the two rentals combine and then offset W2 income or do they remain separate? 

Downpayment was through personal savings from my 9 to 5 and remaining financing for purchase and rehab came from hard money lender (Easy Sreet Capital).

Yes, I know to subtract the expenses from the gross rent, as my calculators have me do so, but my original question still remains - do reno/upgrade costs count against cash flow when calculated at the time of purchase but executed during the first 6 months of ownership?

If you sell right away, you can then keep half the profits (or whichever percentage you like) as a reserve and purchase your second with the remaining funds.

Since your tenant has only been there a 2-3 months, the actual tenant turn expenses could remain fairly low if handled well.