The vast majority of my tenants (particularly the ones I placed and did not inherit) have been great.

I am aware of California's Prop 13+58+19 prop tax inheritance evolution and its complexities with LLCs but we are not considering inheritance or parent->child gifting etc.

inheriting tenants - generally it's better to start with a vacant property, spruce it up, and do your own screening. 

If we buy this loan, we need to have a thorough game plan on how we are going to be resolving this and understanding these dynamics is key to managing expectations and protecting investments.Sounds like a deal more for someone that buys partial inheritance estates and spends years piecing it together than a note investor.  

When we purchased the properties, we inherited some bad tenants and we had to put up some money to rehab some of the properties.  

Quote from @Allison Levine: Hi,I am an accidental landlord, was part of an inheritance.

A good rule when inheriting a large sum of money is don't touch it for one year. 

My wife’s inheritance gone, my Ira gone, had several other things in my life going on.

My inherited tenants ALL SMOKE and none had security deposits. 

I believe you were right he would inherit your cost basis, so he would owe capital gains.