My layperson knowledge of this is if they lose the step up basis it's $3 million minus my original purchase price of $500,000 so now they pay capital gains tax on $2.5 million. 

→ Compare actual performance to original underwriting projections.Was the property sold due to market appreciation?

One that invests in REI (especially across multiple states) will be able to answer the rest of these questions in great detail. 

Answers vs address.  

Keep in mind banks typically price construction debt at WSJ Prime +1% which means you are looking at 9.5% interest even on bank originated debt.

Here is the situationCottage - seller asking $300KSold in 2021 for $225K, seller put about $15K into itBuilt in 1940s, very few updatesNeeds new roof, old 2-wire electrical, original walls, and has an $8K assessment by the association about to come due.700 Sq FtPart of an association owning shared private beach access@ $300K it is $426/sq ftComps (all sold in last 6 months)Cottage sold (to this seller) 5 months ago for $425K @ 872 sq ft = $487/sq ft"Direct" lakefront property part of same associationBuilt in 1940s, some updates3 other comps I've seen that are larger that have similar associations w/ shared private beaches that are "near" lakefront on the same lake.1.

We have been asking ourselves the same question so we unfortunately have no answers… at this time

@Jarrad Berman - not enough information provided to answer your questions.  

Thanks Brittany - I'll keep this in mind for the future - my husband is a Shaker Heights boy from Cleveland originally so you never know...

P.S. my analysis was based on what I believe to be the actual property, which I was able to find, based on the little info in your original post.