He owes $130K on mortgage.

My understanding of auction homes selling for more than what was owed, is that the original owner is entitled to those funds after taxes and fees are paid.  

If you figure $170k purchase + $65k rehab = $235k - $6k down payment = $229k mortgage principal at 5% for 30 years, that comes out to $1230 per month P&I.  

After subtracting utilities, the principal/interest is slightly more than 50%, which means slightly underwater.Basic ROI: Pass. 

So not separate living spaces (like a duplex or triplex).My goal is to probably liquidate the asset at the 2 year mark and invest the no taxed capital gains + downpayment + mortgage principal towards real estate outside of my primary residence so I would ideally like to keep it (from a tax standpoint) as my primary resident vs. doing a 75% rental & 25% primary etc. as the numbers don't work out to keep it long term as a rental.

. $4M worth of assets, owing $3M.

The county sells it at auction, starting price is the back taxes owed.

So if you owe 76% of the ARV to the loan and rehab work just expect to bring a little to closing type of thing. 

Or that plus the difference owed to the bank?

Nobody owes us anything, but I'm glad for the discount when I can get it.