Once you decide that you want to keep them on as tenants, then I'd do a small increase. 5% a year increase is usually the higher end of what someone will tolerate. 2-3% per year is pretty normal for rental increases. 

I’m trying to put myself in a normal person’s shoes, and I feel like I’d be more inclined to answer a phone call and discuss selling my home rather than responding to a post card or yellow letter.

Then treat it like a normal deal.

The situation is my moms long time neighbor ~20 years passed away of old age, I didn’t know him personally but grew up just a few houses down and said hello daily on my walk home from school, normal neighbor stuff.

Do house flippers normally just split the profits ?

Get them out, clean it up, renovate, and find a normal renter. 

Some other articles say that I would owe the full capital gains on the investment side (half the unit so it would be half the capital gains normal tax).

Like where I live, it's normal to do one month of rent for first, last, and security deposit. 

The McLean County Area Landlord Association meets at 112 Boeykens Place, Normal, IL 61761 Contact is Marti Ryan President.

A normal title company might vapor lock over a non standard deal like this, but your RE attorney can create all of the required paperwork to get this deal closed.