These expenses can create a paper loss, which may offset other passive income or carry forward to future years.If you qualify for Real Estate Professional Status (REPS) or actively manage a Short-Term Rental (STR), the losses can be applied against your active W-2 or business income, reducing your overall tax liability.

However, these costs can often be added to your property's basis, which helps reduce capital gains tax when you sell the home.Once the property is officially a short-term rental, subsequent repairs and maintenance would likely qualify as deductible expenses. 

Using your first property as collateral could help reduce the cash you need upfront, but it’s essential to weigh the risks and it's not really recommended specially if this will be your first.I recommend focusing on building reserves or seeking partnerships to fund flips.

Is there any creative way to avoid/reduce capital gains tax on the sale ?

Always have an exit strategy in case refinancing takes longer than expected, such as optimizing rents or reducing expenses.

Because this is the business we've built together, we enjoy working together, we each have roles that reduce the work load on the group and personally I like that the risk is spread out.

Before you do so, make sure that it will, in fact, reduce your current year's taxes.

I retired from my w2 job a few years ago, but recognize that no W2 income reduces loan options.  

But just like you said I think a BRRRR out in Rochester seems very doable so the bulk of my research will definitely be focused there.

Or else reduce enough on price to deal with an eviction from an illegal unit.I don't know Chicago laws, but in NYC if you have an illegal unit, the tenant occupying it seems to have more rights than the owner does and doesn't have to pay rent...