A pay down on mortgage is a tax free return of say 4% while a 5% return on stocks or another real-estate investment is generally taxable.On the other hand, you are able to expense the interest on a mortgage which will help offset your taxable income so it is not a 4% expense every year like @joshua Smith suggests but actually a bit less.

So with a state tax rate of 8.8% I'd normally need $9,100 of taxable net income to owe $800 in taxes, but in California even if the LLC makes less than that I pay $800. 

If you sell, just do a clean sale to a new buyer.A Sub-TO can become an installment sale, there are tax ramifications for the seller to recognize the sale and taxable amounts being due, so a seller that just walks away can have problems (example where they obtained a second mortgage for cash). 

If you do the 1031 but buy down the difference is taxable.

Also, rather than take the funds as a taxable and penalized early distribution you could roll it over to a self-directed IRA or Solo 401k - in which place the full amount would be available for tax-sheltered investing.  

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.

I was just curious to know if HCAD values are affecting negotiations on potential properties, as the seller will most likely know the taxable value of the property, thus possibly minimizing the margin for negotiation. 

Reduce Taxable Income.

I recently closed two deals where I paid the sellers a net amount and I paid all the back taxes and closing costs.My question is, can the property taxes as well as the closing costs be expense'd at year of closing to offset taxable income?

As the others have said, HMLs are strictly for short term.....in and out deals which you aren't doing here.What was your taxable income for last year?