I owned a two family which I rehabbed and which I sold in 2003 and made 200K profit on.

After Repair Value /Comps - Provide comparable sales data that confirms your After Repair ValueRepairs - Provide a detailed estimate/scope of work of the repairs that you are planning for the project.Loan Terms - Provide the financing terms (interest rate, points, holding period) you have budgeted to pay the lenderHolding Period - # of months it will take to rehab & resell the propertyOther Costs - Provide a breakdown of other costs (buying, holding, selling & financing costs) Profit Margin - Highlight the total profit & profit % you have built in the deal.  

I could understand him or anyone else saying 'that's stupid, don't pay your house off' if I was the only one living in it, but it's generating $3,200.00 and month in rental income with the possibility of even more if/when I move out of the basement.

We have a chance of an off market opportunity, with income generated from bonus room and bathroom off garage.  

Whatever the arrangement you come up with NEVER relinquish control of the deal.If you absolutely have to keep them in the deal for the long game them why not give them each 5% ownership in the LLC who will buy and when you cash out structure in such a way that you get 100% of your $$ back first before any profit is distributed.

Do I owe capital gains on any profit from the settlement, as I occupied the house for more than 2 of the last 5 years?

In exchange he's going to take 50% rental profits and 50% of what we get during the refinance. 

They're just trying to cover their costs and make a profit which is smart and you should want them to be successful too. 

@Calvin Lipscomb, When I represent a Buyer (in Illinois) on a purchase of a multi flat, I generally request actual leases, profit and loss, etc. through attorney review and keep the contract contingent upon the Buyer's review and approval of the same.

We have an LLC and split profits.