My now wife (then girlfriend of only one year) jumped right in with me and we closed off a back area that collapsed, removed that from the structure, closed off the upstairs, and made the lower livable.

I believe your depreciable basis when converting to a rental is the Lower of, your purchase price plus major improvements OR current value.

so I am assuming that the capital gain is lower than the ordinary income?

The results would be a far more energy efficient and comfortable building with lower operating costs.  

If you are more interested in cashing out, you'd be better off waiting for an offer to come in, maybe lower your list price.

I'm thinking with the BRRR strategy i can buy it at lower enough price where it would make sense to use the VA loan to roll the rehab with it.

Mine is through US bank and has decent terms but they just lowered their limits to 85% LTV from 90%, I would guess you could find a higher limit out there somewhere. 

Next time .......I know where to go for much lower. 

Invest in $100k Maumee properties and you will certainly have better tenants and fewer headaches but commensurately lower returns. 

Moderate to Low Risk Areas: Zones B, C, and X -- Lower-cost flood insurance available to all property owners andrenters.