It's not great either but they are stating if given this deal once I have 5 properties; they will allow me to convert my 5 properties (I have an LLC but the properties are all in my name not in the LLC yet) over to a commercial loan (5 properties min) and give me a line of credit to continue buying additional properties.

We have one right now we are in where the borrowers loan has matured and they as part of the restructuring want to convert the loan to a 30 year fixed loan at 1/2 the interest rate of the current loan.

This seems like a lot of work to save 15% of $35k in taxes (Less than $5k.) especially if you have transfer taxes or title insurance, or you convert your long term 15% rate in to your son’s regular income tax bracket.I hate paying taxes as much as the next guy but this lemon isn’t worth squeezing.

I assume you are probably losing a few of those bedrooms for living rooms, kitchens,  hallways, stairways etc. if converted from 2 to 3 units.  

Convert the Property to a Primary Residence: If you live in the property for at least two of the five years before selling, you may qualify for the primary residence exclusion, which allows you to exclude up to $250,000 of capital gains ($500,000 for married couples) from taxation.4.

To be fair to them it had been a rental for 10 years and it took 3 inches of rain in 2 hours to fully expose the issue.

You could 1031 out of the property, purchase a new one or something you might like, "Live" there for two years and convert the property to a primary residence. 

The BIGGEST mistake wholesalers make is diving into lead generation before you have anything set up to convert those leads when, and if, you DO find them.What is the point of trying to reach out to prospects when you have no system set up to convert these prospects into leads?

Converting the entire property to a rental later allows full deductions but eliminates primary residence tax benefits, potentially increasing capital gains taxes on sale.

You can't really convert it to a rental property and then do a renovation as you will have no cash flow as a rental so I am not sure if you are trying to classify it somehow, but I don't think that matters at all.