.-$2-3k at least in holding costs“Hoping for a $4k profit”?????

In selling this it would most likely be a profit of over 300k. 

I'm holding it until it's painless or profitable to sell, and focusing on things that make me more money in the meantime. nobody owns all homerun deals.

You could always start marketing for deals (using mailing / list services) and then partner with another local investor who can take has the bandwidth to take on your inbound leads and can handle negotiations, acquisition/exit strategies, contract administration, etc. in exchange for a profit split.

Also will IRS give him/ me tax free profit at the sale or how would that work?

I did not, I found the deal and did the work in exchange for 50% of profit.

The main problem I need to solve is to convert it back to a legal single family house so an end buyer can get conventional financing on it.Up and above that Its up to my discretion on the level of finish.Or I could take the easy profit and sell now...

On the other hand, we would start to lose our $500,000 exemption (we are currently at about $422,000 in profit using the redfin estimate).

Mindful of the fact that I'd like a way to generate income to reinvest and grow and I don't know anything about buying and selling REO, notes, tax-liens, and all the other seemingly 'quick-turn profit niches out there , is Multi-Family smart to start with?

Best wishes for a profitable future.