Basically, there's no free lunch when it comes to taxes.Depreciating property lowers your tax basis.

I don't charge renter's insurance for my lower class properties.

Many states have discounted property taxes and lower yearly increases for owner occupied properties.

I would tell people today that if you buy a primary residence expect to stay in that home for atleast five years, especially with a FHA loan which has lower down payment as the current forecasts for home appreciation or very low which with closing costs on the buy and sell, it will take several years to have equity in the property and enough to be able to sell, so that is something also to consider.

Rentals are extremely difficult to make pencil right now but would only personally consider higher end projects because the costs are far easier to absorb than trying to build in lower value neighborhoods.

Getting a loan to payoff another loan with a lower interest rate doesn't make any sense. we do private lending and can get double digits returns consistently.

If I were you, I'd pass on this property and look for something else (and I suggest a 3 BR) under $80 that you can put a little rehab into, unless insurance pays your family member a bunch of money and they accept a much lower price. 

Most hosts just lower their prices when things get rough but guests just want am interesting experience. 

So in that a much lower rate of return is acceptable given the safety and certainty level of things. 

Would the IRS allow them to benefit from a 1031 Exchange if they would be "swapping" a million-dollar rental for one that is much lower in price?