What your taxpayer seems to be is a flipper and real estate professional, all of which is Sched C. If a property is never listed for sale, that would be the rental that is their operational asset with depreciation.

Selling as a cash out or selling as "carrying the note" doesn't change the nature of the sale and doesn't affect the property. It is a cash flow difference.

As for the length of time holding a property for sale, but going ahead with having it occupied, I found you a good reference that explains in some cases, it should be held at least 90 days, for FHA/VA buyers. Read this article:

https://newsilver.com/the-lender/how-long-do-you-have-to-hold-a-house-before-flipping-it/

I have never seen a firm definition from the IRS on "how long to hold flipping property is too long." For example, a widow/er can sell up to 2 years and still be considered to have the FMV from date of death.

If you have the market comparable that homes can take perhaps 2-3 years to repair and be on the market, then having them occupied doesn't turn them into working asset. Occupancy might be the best way to protect the improved property in that area. They would still be inventory, which doesn't depreciate. The cost on hand still is the cost on hand. Once it sells and the tenants vacate, there might be some further investment for repairs or required change per the buy/sell, which goes into basis.