This is a very complicated situation and you will need to consult a commercial mortgage broker (Like myself) Commercial properties have completely different loan terms than residential and are rarely 30 years fixed like your accustom to.

In most cases, neither is warranted.Warning: I am not an attorney, and this can be a complicated topic.

No reason to complicate it.

A C-10 Electrical contractor can explain how to split the units, you may have to sub meter yourself.splitting a single unit in 2 is generally more complicated than building a common wall. 

The tenant is an older veteran who is mild mannered and appears to have a lot of health complications.

That’s a complicated set of questions but it insures you get past every reason it would be taxable.

The simple answer is yes if you were using conventional, it gets complicated if you were to use FHA on your 2nd primary.

There just isn't much guidance available. asking for detailed answer for a complicated set up like this .

In order to do this, the law has to become complicated and convoluted. 

@John Dean, There's another complication with owner financing when you want to do a 1031 exchange.