Get the deals going first, build some equity and cash flow, set them up with proper insurance and umbrella insurance coverage, establish proper maintenance and property management, then look into structures, entities and strategies for asset protection.Here, a diagram to help you on this path:

Set backs are not proper, one water meter serves both properties, and sewer for one runs under the other house.I know I'm in for something close to $50K in engineering and filing fees to do this, but my question is: is anyone familiar with engineering /architecture firms here that are pros as far as getting this done, ie, it's what they do? 

We already have a well and water system installed able to accommodate the new build but That's about all I know.

Most of the features need to be activated and set up manually and procedures need to be in place in order for it to work properly. 

So whether your son gets it as a gift and in a year or so sells and 1031s it, or whether you gift part of it to him and then you both sell and 1031 as tenants in common - both would be proper use of the 1031 exchange. 

Asset protection,Reside in CA, and read about RE investors having the option to start a LLC in NV that's within a trust and also purchase an umbrella personal liability insurance policy (upwards of a $1m - 2m+), to give aspiring RE Investor the proper business structure, security and protection in case of the inevitable lawsuit and/or other costs of doing business. 

I will look up on how to properly clean it up and send my friend who's in the area to do it.

Likewise, the fact that they didn't properly realize how good they had it with you for so long isn't your problem.

I was told this was not proper. 

Much more likely to make a mistake and buy in the wrong area and overpay if you don't do the proper research.I generally only recommend to more seasoned investors, but it can definitely be done.