That's seems like you are punishing them so much they will just leave

This starts with defining your market, then setting rental criteria, then doing thorough screening which includes doing background checks.The information I shared about Rental Criteria and Tenant Screening can be found by going to the blue bar at the top of this page... go to Resources... go to File Place... go to Other Documents.Here is an excerpt from our Rental Criteria regarding evictions:" Evictionor unlawful detainer action which has been resolved with full restitution maybe approved with additional security deposit. 

LOL - you should live there unless you're OK with mortgage fraud :)  I know of someone who did that and when I found out, gently reminded him that it's something investigated by the FBI - and is punishable with prison...

However, thisduty plainly does not include an obligation to obey any unlawful instructions; for example, an instruction notto market the property to minorities or to misrepresent the condition of the property.

Will I be punished in some way or how do I handle this scenario?

Although I don't believe that getting a second job will be punctually helpful or selling something would be enough money or not perceived as a self imposed "punishment", unless you need to sell stuff to clear up your life.

Our in-house attorney is the one who brought the issues up of unlawful utility arrangements, that was my first encounter with the matter.

While there is no statutory holding period there is so much opportunity for basis shifting and unlawfully accessing what amounts to gain prior to a 1031 that if audited your exchange would have a hard time standing.  

I am not looking to commit mortgage fraud or anything unlawful, unethical or immoral for that matter.

File an unlawful detainer and evict them if they don't move on their own in a timely manner.