In your instance the smoke and mirrors seem to be hiding fatal flaws in the deal.

And when you sell it if you meet the primary residence requirements the profit is tax free.It is possible in many instances to own successful rental real estate that generates real dollars in your pocket but operates at a loss for tax purposes. 

For instance, if it was an amazing deal, you would have people clamoring to be part of the investment and you'd have to turn people away.

For instance, I would be surprised if she hadn't been late on rent before this.

In either instance, I would certainly have an attorney make sure everything is buttoned up and legal to protect you both.  

In that instance, you can only count up to 30% of your income as boarder income. 

For instance, we bought/sold 5 flips last year so we have 5 "buckets" each transaction could fall in PLUS our general office expenses (Google ads, Propstream, DealSimple, etc.) 

You do not have to sell all at once - you could keep the 3 best ones and sell off the other 2, for instance. 

And in most instances, they can't be within a certain distance of one another.

I don’t have much to offer on that front, but I just wanted to say hi to the famous @Judd Campbell!