It seems to me that the issue is one property is owner occupied and considered to be lower risk, while the other house is non-owner occupied and is considered by the lender to be higher risk.  

Last point, and to answer your final question, no, your lender will not issue the loan if both units are still occupied by closing.

If you are truly going to occupy this as your primary residence you would get two liens. 

Just closed two duplex' yesterday that are fully occupied.

I tried adding a non occupying co-borrower, but I keep getting mixed information on wether I can still get the 3.5% down payment.

If you are going to owner-occupy usually you can do less down.

Any property that is not fully occupied is inherently more difficult to finance.

I am not a CPA, so be sure to speak with yours...but to your main question:  yes, she will have to pay capital gains taxes on any gains since she has not occupied the property in the last 5 years. 

Hi BP - I'm trying to purchase a 4-plex in Sacramento, CA that I can either use as a primary residence (owner occupy one of the units) or as an investment. 

In the past I didn't allow dogs but I bought a small portfolio and literally all the occupied units have dogs and so I would be more likely to admit a dog at that place but not at my other dogless MF properties.