I'm not a tax expert but if you've held them for 12 months or more, the gain will be treated as capital gains which is more favorable then ordinary income.

then once the house if complete you could...1. sell the new house and pay ordinary income tax on it.2.

Maybe, and maybe not.The starting point is to figure out your intentions in regards to this deal and whether it qualifies as an investment (with capital gains) or a flipping business (with business income taxed at ordinary rates + self-employment tax).

I was cited 3 times for nonexistent infractions like "tiny house parked on land" and "illegal patio" (there were 3 stairs constructed from wood that came up to a 3 ft square landing they claimed was an "illegal patio") and "structure is a nuisance to the neighborhood." 

That will be taxed at ordinary incomeThe seller also has a tax basis on the assets.

It reduces your taxable profits by 20 percent, and the remaining profits are taxed at your ordinary rate. 

- Would interest expenses under one structure be deductible against my personal (W-2) Ordinary Income? 

So, the truth is remove the agent in mass, ok, what your doing is laying fertile ground for one like myself with commanding knowledge of it all, to just burn through the country side like a Mongolian Invader because when it's just normal ordinary people trying to do such a legal technical thing we can hide all kinds of terms all over the place. 

I have a bucket list of small-medium sized projects for the property but would include:Repair bathroom flooring (eater damage/rot)Replace kitchen countertop and sinkReplace kitchen vinyl flooringReplace a number of light fixturesAdd railing to outdoor stairsReinforce patio support beams.Etc...Thanks!

Is there something out of the ordinary you're concerned about?