I am assuming that the interest paid on rental property loan will be bring down by taxable income on rental.

In comparison if rent the home as is, you get 0 tenant paid mortgage service and as much as $4kmnth cash flow, which by the way is not only fully taxable BUT it also may adjust your tax bracket up as a whole, raising your taxes entirely there in muting that $4k net to being even less.

The IRS looks at your sale as a one time taxable event to you, this is somewhat complicated.

If your employer plan allows for in-service withdrawals you could make non-taxable rollovers from that plan to a checkbook-control IRA or Solo 401k from which you could invest in RE.

For a business owner with $100,000 taxable annual income, the net tax savings for using an S Corporation instead of an LLC in taxes paid every year can be as high as $7,500.Holding PropertiesWhen holding properties as a cash flow investor, the LLC (or LP) is generally the better choice because an LLC has more liberal distribution rules.

For example if you had a $3000 loss on a rental property, it would deduct $3000 from your taxable income.

In other words, if the person was a relative instead of a parent, would the gift then be taxable?

When a tax-exempt entity engages in a trade or business on a regular or repeated basis, it is subjected to tax on Unrelated Business Taxable Income. 

The remaining gain above that is taxable regarldess of how the proceeds are utilized. 

For a lender, the interest income is taxable, principle repayment has no tax consequences.