An S Corporation or an LLC taxed as an S corporation may help you save on some social security tax as an example.

(Resulting in only 2/16th tax free (12.5%)) Then you can choose to do a 1031 with the reminding 25% or pay the taxes.  

I don't want to pay federal income taxes on the earnings I give them, the "interest" payout.

I don't want to pay federal income taxes on the earnings I give them, the "interest" payout.

This equates to over $11,000 extra in taxes that we would have had to pay in December this year. 

If it wasn’t formalized, now’s a good time to document it clearly with a short agreement outlining who contributed what, how profits are split, and how taxes will be handled.

At 8.5% on ~$104K, you are basically getting a guaranteed 8.5% “return” by paying it down, plus improving cash flow right away, which matters here because your property is actually negative after debt.If your goal is stronger cash flow and lower risk → paying off (or paying down) the loan makes sense.If you have a clearly better deal lined up that will beat 8.5% after taxes and you are okay keeping leverage → then deploying into the new deal could work.

According to Airbnb:Guests who book Airbnb listings that are located in the City of Tuscaloosa, AL will pay the following tax as part of their reservation:City of Tuscaloosa Lodging Tax: 11% of the listing price, including any cleaning fees, for reservations 29 days or shorter.

If your underwriting is based on what the seller is paying today, you’re not analyzing the deal.

Expect to pay self employment tax and switch to a more real estate focused CPA.