I want to keep my current financial position in these properties for tax purposes.

Very landlord friendly, low taxes, stable diverse economy, population growth.

Maybe you will end up in Tax Court with a case of first impression.  

This would be done by leveraging private funding for down payments that will be payment free for two years but then paid out with a balloon payment plus interest on the back end via a tax excluded sale of our current rental property in two years, giving us a very large payment of tax-free income.Thoughts?

That's six months of free rent (thanks to the tax-payers and a government that loves to be generous with other people's money). 

These are generating tax free income!

In Maryland you could be consider a foreclosures consultant and be liable for big fines and jail time if you don't do it right!

You can get 2 houses in B areas in Montgomery for $250,000.  125k house will rent for $1,050 -1,150.And, second lowest property taxes in the nation behind Hawaii.

Cons: take a big tax hit up front, so I start with less money invested.

Triple net leases (NNN) are standard, and they cover taxes, insurance, and maintenance.For your 1.8-acre parcel, if it's zoned for auto work and sales, you’re good to get started.