Ordinary Income Taxes on the distribution of the property to the Co-Trustees at the time they tax possession in Tax Year 3 are projected to be $300K.

It will need quite a bit of work (everything from kitchen, 2 baths, flooring, popcorn ceilings, paint, add recessed lighting, some plumbing work, replace patio, eventually landscaping.. basically everything needs to be touched) so we're looking for a reasonable, reliable contractor.  

Unless you need some earned income to invest in an IRA like I do, you won't want to turn passive income into ordinary SE taxed income. 

A good investment accounts for mortgage, taxes, insurance, vacancy, ordinary maintenance, capex, etc.

He has built a patio structure (great work), installed diving board (great work), turned 2 half bathrooms into full bathrooms (great work), framed to have sliders where there were windows previously (good framing, mediocre finishing), fixed window contractor's poor finishing job (great work), 3 complete bathroom remodels including installing jacuzzi tub (great work), fixed car port structure (great work), extended a chimney great work), replace roof on a patio (great work), repairs from giant tree fall (good work). 

Give the tenants one number or email for ordinary questions or maintenance requests, then give them separate instructions for reporting emergencies.

The Second apartment is a multi level, vaulted cielings, 2 bedroom, 2 bath, with balcony patio. 3 Car garage, workshop, tool room, and 2 car car port.

Once you have built the new house it has been argued that you have changed the nature of the property and some interpretations are that if you build and sell you then have to pay ordinary income as if the land was inventory. 

@Shodhan PatelInsurance expenses related to your business that are ordinary and necessary are deductible.

It appears that rental incomes and/or proceeds from a flip would be taxed as ordinary income.