If I understand it correctly, she will have to pay taxes on the selling price minus the purchase price, cost of any improvements, and 500k federal exemption.Are there any other strategies which could be employed to reduce the tax burden?

My general rule is a hard pass on anything violent, like battery. 

There have been no improvements or repairs made on the home.

The best suggestion I have is to spend some time comparing your units to the others in your immediate area and don't over-improve as often there is a natural price "cap" in the neighborhood and regardless of the small upgrades that really do improve the living experience, it's hard to make them into the rental rate if you are near the top of your market.

(Many won't, and don't bend the rules for anyone, that NEVER works out.)Check out https://www.biggerpockets.com/renewsblog/2013/01/27/tenant-screening/

Yes, your "cash flow potential" might improve over time, but, so might your cash flow expenses!

I follow the same rules regardless of the investment opportunity.

If I am looking to do the lease option in my market area (Southern California) but the rent does not follow the 1% rule however it does cover the cost of the mortgage is that acceptable?

I was able to pay my mortgage  off when my mortgage loan when it was about 10 years old with a Home Improvement loan at that time for 1.99% I have learned recently that the Bankers are trained to withhold anything that might be considered negative from you. 

@Chris Spencer For me, as a rule of thumb, every ~35k-40k that I invest at the moment, gets me around $800 - $900 Dollars in monthly net cash flow.