This basis would be divided between the two houses. 

Decided to tear out the dividing fence between our buildings and parking lots. 

Or, second option if you are not single, you could find a house on the wholesale list that can be divided into two units or a house that has a guest house and then fix it up and rent out one of the units and stay in the other.

So, there is no argument for using margin account to try meet/beat REI returns because it would just nurf your WS returns down all the more, expanding the divide between the 2.  

I've been keep tracking of all my rehab expenses and dividing that by our total square footage.

Finally, when the property sells, and I divide the profit and pay off my investor, how will I account for that?

You can get REPS status regardless of how you handle depreciation.Straight Line Depreciation - This is taken 27.5 years on residential and 39 for commercial.Accelerated Depreciation - This requires a cost segregation analysis so you can divide the total value of the building into 5, 7, 15, and 27.5 (or 39) year depreciation buckets.  

If it was dividable into smaller units it would be even easier to fill.   

Here is a list of states divided into three categories, based on my internet research.  

You can increase returns with leverage (that is a mortgage) or with value add (renovations, additions etc).I think cap rates (rents minus expenses divided by purchase price) on commercial and industrial is higher with less work involved, but its more expensive than I can afford--so I know next to nothing about that land.