Unless you're using an FHA that requires 3.5% down, you're going to have to front a lot more money than 5% for a downpayment.Assuming: you buy for $175k and rehab costs are a very modest $10k (Loan ammortized at 30 years, 4.5% APR)Rent is $1360 as you say it isProperty tax as you say it is8% for Vacancy8% for Capex8% for RepairsJust factoring these things in, you're almost at -$100 cash flow per month.

This may be a minor point but the government will not come after you unless you do not pay your property tax.

You'd still pay $33,333 in taxes to get that $100,000, but you'd never pay the capital gains tax as long as you withdraw after 59 1/2.I only started exploring this recently.

Some villages in my County have a total tax rate of almost 8% (no, not sales tax, property tax.) 

Make sure you set up a separate entity for your long-term stuff (or even better an LLC for each property...) and one for flips if you end up doing any - that way there's no chance of being hit for self-employment tax as a 'dealer' under IRS code, for properties that you should have only been paying long-term capital gains tax, on sales of properties that you've held for over a year.

He may be able to do what is known as an installment sale on a land contract - this is where the transfer of the deed is made upon the last payment so you're only paying the tax as the seller collects the money (as opposed to all at once).This strategy varies from state to to state so it's best to check with a local Real Estate attorney.

Selling has the upside of no capital gains tax as I've been in the home for more than two years.  

Mort interest, re tax, as well as rental related expenses... bug spraying, maintenance, yard care for that half ect The improvements you made to the duplex get added to it's basis and depreciated over the 27.5 years just like the property. 

Your father in law would potentially be looking at gift tax, capital gains tax, as well as transfer tax on the sale.

Also, from my experience working in real estate tax as an accountant, most clients tend to adopt an LLC "tree" type strategy where they keep property in one LLC, and have it managed and owned by a separate LLC.