When it's sold it will be taxed as capital gains tax and may also have some unrecaptured depreciation which is capped at 25% and  recaptured depreciation as well which can be up to your ordinary income tax rate.

Net investment income tax= 3.8%I was aware of the Long term capital gains tax, but I was surprised to find out about the Depreciation Recapture and the Net investment income tax. 

Sadly, the "home office" deduction is one of the IRS pet peeves meaning that you are more likely to be audited for this deduction when it is on your personal income tax return.

Any tax knowledge of if people doing this strategy are able to take the losses from the cost seg study (on the ADU) to offset their W2 income?

Also, focus on 2 years of job/income stability.Class D Properties:Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciationVacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions.

You need sufficient NET (after all expenses) self-employment income from something like contract (1099) work, being a Realtor, wholesaling and so on.

@Nate WilliamsWith one income, two kids, and limited cash flow, minimizing risk is key.

This is generally correct, DSCR loans do not look at all at your personal income.  

There are only 2 ways, as I see it in the current market, to get actual income/cash flow from a rental property - a paid off long term/mid term property or a well bought short term or rent by the room rental.

I highly recommend you study this, practice it, and apply it.https://www.biggerpockets.com/blog/rental-property-cash-flow...Property Details:Type: Single-family homePurchase Price: $289,900Down Payment: 20% ($57,980)Loan Amount: $231,920Interest Rate: 6.85%Loan Term: 30 yearsMonthly Mortgage Payment:Using a mortgage calculator, your principal and interest will cost $1,515 per monthRental Income:Average Rent for Single-Family Home: $2,171 per monthOperating Expenses:Property Taxes: $300 per monthInsurance: $100 per monthMaintenance and Repairs: Budgeting 5% of rental income ($109 per month)Vacancy Rate: Assuming 5% vacancy ($109 per month)Property Management Fees: If outsourced, typically 10% of rental income ($217 per month)Total Monthly Expenses:Operating Expenses: $835Mortgage Payment: $1,515Total Expenses: $2,350Net Monthly Cash Flow:Rental Income: $2,171Total Expenses: $2,350Net Cash Flow: -$179 per monthConclusion:In this scenario, the rental income of $2,171 per month does not fully cover the total monthly expenses of $2,350, resulting in a negative cash flow of $179.