It appears most or all of these would not apply to most investors (e.g. homestead exemptions, exemptions for owners over 65, etc.). 

Perhaps if I had listed the house at 145k, the appraiser would have had an easier time justifying that number and may have even found room to support it.

The deal appears solid but their process is new to me.

The IRS publication 527 does not appear to be much help.My reason for asking is because I bought a multifamily unit and have done ~$75,000 of upgrades to the property. 

Do some research on sales of controlling interests (will this actually avoid any transfer costs), local bulk sales laws (will there be other taxes due or will creditors appear), and the limitations of seller warranties and indemnities (is my contract worth the paper it's printed on).

@Andy Rousch and @Chris Sellers My preference is investing in condos, easier to manage, easier to rent out in my investment markets of Washington DC, and Orange County California.

The idea is that you want to give them a better return than they could get from a relatively secure investment and still be cheaper and easier than hard money.

As far as ther downstairs goes, since the downstairs kitchen is decent size, I was looking at walling off the dining room and making a 3rd bedroom.  3 bedroom apartments appear to rent for 750 - 1000 so I am thinking I would sacrifice the dining room for the added value of the extra bedroom. 

I am concerned that it appears you are considering renting to someone you have known many years.

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