Unsure about the federal tax consequences --- that's a CPA conversation.You can do either a partnership or S-Corp.

@Imthiaz Ahmed The 4-unit limit is I believe a Fannie Mae and Freddie Mac limitation: http://www.freddiemac.com/singlefamily/news/2017/1128_loan_limits.htmlAnything beyond that, and your investment is no longer backed by the government, which is why you can get the lowest rates on conventional loans (i.e. less risk).The question to ask yourself is, is a commercial loan all that bad?

@David C.The government needs its money.

(This should govern your leases as well) you may not need to consult with an attorney JUST for this issue....It's never a bad idea to run things by a real estate attorney anyways.

If I understand it correctly, she will have to pay taxes on the selling price minus the purchase price, cost of any improvements, and 500k federal exemption.Are there any other strategies which could be employed to reduce the tax burden?

I have a guy (with 4 yr son) whose background checks indicates 700+ credit score, stable federal job (3X salary vs rent) for last 8 years, good references from past 2 landlords BUT had chapter 7 bankruptcy that was discharged in 2013. 

I only invest in areas where the local government/communities have good long term strategies in place.  

Check your local governance for how long to retain.In California, for a written lease keep it for 4 years minimum from the date of vacancy. 

Do not say anything that might be Federally be looked as possible discretionary language. 

However, I've also heard that the government is lowering their voucher amounts so that they can provide more vouchers to more families.