I claim my interest payments as ordinary income.

Fortunately, the IRS provided IRC Section 1231, which treats losses from the sale of real estate as ordinary losses, as opposed to capital losses.

Used cars with such extensive mileage on them require maintenance, including inevitably some time in the shop (even if it is nothing out of the ordinary).  

Without the proper entity, you pay your ordinary income tax rate (think W2 wages) and you have to pay both the employee and the employer portion of employment taxes since you are considered to be self-employed. 

Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year,Property held primarily for sale to customers in the ordinary course of a trade or business, The last part feels like interpretive case-by-case basis.

So, if your friend flips this property, it will be considered a dealer-like transaction for this property and he'll get hit with ordinary income taxes at his marginal rate.As for intent, if the sale is done in less than one year (and especially if a tenant never occupies the property), the IRS will likely consider it a flip and he'll be subject to ordinary income taxes.Best case (unlikely), it will be considered short-term capital gains, which will still be taxed at ordinary income rates -- so there's isn't much upside to arguing that, and would probably cause unnecessary attention from the IRS.All that said, I'm not a tax professional...

First, the income from flipping houses is not considered capital gains, it's considered ordinary business income.

When you sell it the gain on the sale is ordinary income, just like from a job.

We have a good-sized, fenced back yard with a covered and sheltered patio that would theoretically be a good place to keep an outdoor pet. 

Sometimes you have cashflow even when you have a loss from the tax perspective. 1) If you didn't have $400k of income, you could deduct 25k of a passive rental loss against your W-2 ( ordinary income)  limited to phase out starting 100k. 2) if you are such a high earner, you can offset the passive loss that you generate via rental properties to the other passive income  ( investment in the partnership as a limited investor or any other business where you materially do not participate).