So they say "technically 7 days is the law" but you don't have to be a lawyer to see they're pencil-whipping an old statute about something else and applying just a select line of that to STR, which was not the intention of that reg.

And they know this low amount of money lawyers wont go after so it’s either we take the loss and it is what it is or we fight them about it.

Make sure to consult your immigration lawyer before proceeding.

I am going to have my lawyer look over the contract that my friend and I will sign.

In addition, it would seem that you would lose the stepped up basis at death if you are on the title.I suggest you consult a CA profession tax consultant and possibly a CA probate lawyer.  

This is a lawyer questions because you can't generally pay a fee. 

The lawyering I did drawing up my own legal documents did not turn out well, I can tell you that!

@Pandu Chimata, As a private lender myself, typically what happens is the title company has an in house lawyer, where you can get a mortgage and note prepared for free.

We also retained a lawyer so the property won't forclose.

HOWEVER, consult with your lawyer and/or property manager to verify the applicability of the law.