The problem with holding it as a longer-term rental is that -- after a full remodel -- it's unlikely I'll be able to refinance out 100% of my investment, so while I'm holding it as a rental, I have some cash invested.

I have an Ohio client with an estranged spouse in Arizona (a community property state) and I need to figure out how my client can file tax return without income and withholding information from husband.

To specifically answer your question, I would classify the free and clear home as an asset IF we were talking about the balance sheet, but on the income and expense sheet, it would be a liability as it has costs associated with holding it.

If they find the home doesn't meet HUD minimum standards they will require the landlord to fix within a certain time period otherwise they will withhold the rent.

You might be able to withhold that from the security deposit.

Based on this we decide on the amount of money to withhold from the deposite and make sure its all justified.

If you don't get any response I would then notify them again by certified mail that you will be withholding dues pending receipt of this information and putting your dues in escrow monthly.

One thing to think about and plan for is that if you cash out the $120k inherited IRA, yes your marginal income goes up $120k for this year, but if you don't have the appropriate amount of taxes withheld from the distribution (some places may force you to withhold taxes-ask your custodian) you will owe quarterly tax payments for 2010 based on an income that is $120k higher this year than normal.

In this case it is unfortunate that the sellers appear to be withholding information that would help you to make your offer.  

I encourage you to pursue this deal.There is a lot of meat on this one, might be worth looking for an experienced investor to partner with.