The real estate tax rate within Hamilton County is often seen as prohibitive.

It would also make 1031 tax deferred exchange a more viable approach and tool you can use.

Haven't found much resources on how to structure the deal whether to buy out partner's shares at existing basis (I believe this wouldn't be advantageous as I wouldn't get to mark the asset to market and lose out on depreciation) or open new LLC or S-Corp and buy out both partners (I would end up taking gain tax due to sale but would get new dep. basis).

Still talk to your CPA to understand the tax implications. 

How are you going to deduct mortgage interest, depreciation, property taxes, insurance, etc on the cottage tied to your primary home - without getting flagged for an IRS audit?

Looking to invest out of state (TX is no good with its high taxes). 

Does this also mean “selling” the property to the LLC and paying capital gains tax?

I would say it's never too late, but I'll be honest that it is becoming harder and harder to find LTR's around the Melbourne area that are cash flow positive after insurance, taxes, today's interest rates, and current prices. 

(Ex: vacant list, tax delinquent list etc...) 

First, you always wind up being in for more than you budget, always, and two if you are cutting the capital requirement needed close then you can go under and default.Truth be told, to get through a deal and afford: Down Payment, Closing Costs, Holding Costs, Deposit for contractor, taxes, insurance.