With respect to your question about financing, I recommend that you make a downpayment of at least 20% to prevent PMI (private mortgage insurance) from being tacked on as an additional expense. Beyond that how much additional down payment depends on your other investment options as well as well as your available cash flow.
With respect to the "potential" tax deduction associated with rental properties. You will only be able to treat the property as a rental, properly reportable on schedule E on your 1040 return, if you charge your parents a fair market value rent. I would even recommend that you have a standard, written lease commonly used in your area drawn up and adhered to. Further, I would recommend that you establish a separate bank account to receive rental receipts and make payments from for all expenses. Doing so establishes that you are treating the property as an investment rather then as a personal property or second residence.
The issue here is that you are going to have family residing in the property. By having your parents in the property without charging a fair market value rent, the IRS will disallow all deductions associated with the property except for property taxes and mortgage interest. Under Internal Revenue Code Sec. 280A your parents are considered family and their use of the property without paying rent (or paying a below market rent) would be considered "personal use". Their use would be attributable to you, thus, it would be as if you used the home as your second residence.
In order to be able to deduct expenses beyond property taxes and mortgage interest (i.e. H.O.A. fees, insurance, gardening, repairs, depreciation) you need to treat the rental like an investment/business and your parents as if they were not your relatives. Otherwise, you just have a second residence that you treat for tax purposes just like your primary residence.
The only difference between your primary residence and this second residence would be that when you sell it you will not be able to take advantage of the once every two year gain exclusion ($250K if single, $500k if MFJ) available under IRC Sec. 121 for primary residences. Instead any gain would be subject to tax. If you held the property more then one year the maximum tax rate would be 15% capital gains tax (5% to the extent the gain would be subject to the 10% and 15% brackets). If the property is held for one year or less the gain is treated as ordinary income subject to tax at your marginal tax rate (i.e. like wages and interest income).
Lets slow down and make sure I understand what happened. If I read you questions correctly, the attorney apparently structured some sort of arrangement whereby you succeeded to ownership of the property but your parents retained a life estate (i.e. the ability to remain in the house until they die).
If you can please give me specifics on how this was accomplished. Was the house deeded outright to you or was it placed in a trust with you as trustee? Was a gift tax return (i.e. Form 709) ever filed by the attorney or someone else? Who was responsible for maintaining the property, paying property taxes, mortgage payments (if any), etc.?
Whatever you can tell me about how the home was titled throughout htis process will help.
I am not sure what a "warranty deed" is or what rights it confers. I would go back to the attorney and have him/her explain the purpose of the structure and what rights it confers on everybody. Because I have not seen the paperwork it is difficult for me to determine who owns the property and who has the right to sell or transfer what (the attorney should be able to clear this up). Whoever has the right to sell/transfer the property (or some portion of it) will bear the associated tax burden.
My take (and its just my opinion from afar) is that you likely have full ownership subject to the life estate. You would likely need your father's permission to sell (i.e. cancel the life estate). Whether this constitues a taxable gift I am not sure since it would be difficult to value. If you convert the property back to your father so he can sell it, you will likely have made a taxable gift back to him.
I suspect the structure of this deal has more to do with medicaid protection (i.e. to prevent the house from being liened to recoup medicaid expenses) then anything else.
First, go to the attorney and get as many facts as you can about the purpose of the original transaction and the rights of all parties under this arrangement. If the reason for structuring the original gift still remains, you will need to explore with the attorney ways you could monetize the equity in the property while still meeting the objective. Next, take all these facts and potential strategies and see a competent CPA who could advise you on all the tax ramifications.
Unfortunately, I think this is the best I can do without seeing all the paperwork and talking with the original parties. You can get it straightened out by following the above steps.