Also know that the 203k is less and less popular now, since most renovation loans have moved to the fannie mae homestyle.

Since the house was already going to be a rental when we moved to the next, I decided to claim rent, depreciate it, and expenses.  

So, where can she move her money after selling in order to avoid capital gains tax?

If you have previously treated this property as an investment property, one option you have is to move out of this property, move into a different property you own (or into a rental), and then do a 1031 exchange.

I think I'm ready to move forward with the first step in hiring an architect and using their drawings to get estimates from prospective licensed contractors.

Im looking at 7% however I think a better safe guard for me to have enough skin in the game is to move the sales price higher just in case he decides to pay off the loan earlier.

The seller needs moving money, there are oftentimes an arrears that has to be paid on the loan, there are oftentimes HOA fees that are due, there are title costs, there are escrow costs, usually there is deferred maintenance, you have to make mortgage payments out of pocket until you get a renter in there, you have to pay utilities and taxes, and you need reserves in case it all doesn't go as planned.3.

It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.

is there a vacant unit for you to move into?

Either buy all cash and do a cash purchase refi immediately and move the funds to the next purchase.