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I do not think we need to add nofollow tag to links which pointing pages of the same website. It is always appreciated to have a well structured internal link scheme for your website and the PR should flow freely between inner pages of your website.
If I am in your position, I will never add...
Then why don't keep two websites as Brian said. If I am in your situation, I will keep two websites. Any way proper 301 redirection is the only solution for your issue. Proper 301 redirection can bring back the previous rankings and PR for your new domain even within weeks.
If you are trying to achieve higher position in Google Local better you include your physical address and phone number with local address in your website home page. Citation is Good and very important with lot of positive reviews about your services. Ask your customers to write reviews for...
Benefits of link wheel is all wheels are relevant to your money site. If you are good in making contents and start blogs (you need to do a little bit hardworking), it is a nice idea to start link wheel. Just search in Google for more details about it.