So he would pay state taxes on the sale but would shelter all federal taxes.

You can still take the expense; however, the penalties for failure to issue are severe.https://www.irs.gov/government-entities/federal-st...I would recommend doing it after the fact.

He represents media owners in outdoor advertising lease and land acquisitions, first amendment issues, and federal, state and local regulation matters.

Are there any grants (city / state / federal) that I may be able to apply for as a first time home owner?

Federal will be much more difficult than local or state.If you have the time or interest, you can chase them down.

Technically, while someone might say it can take up to six months, by Federal statute, the lender is required to decision any short sale offer within 30 days.

And any experienced QI with a national footprint can help you with that 1031 since that is a federal statute that states follow.  

If you give them interest in the property directly, what’s  to stop the federal government from attaching a tax lien to it?

Age discrimination, a federal fair housing violation. 

Here is some IRS information regarding the penalties for not filing the 1099s. https://www.irs.gov/government-entities/federal-state-local-governments/increase-in-information-return-penalties-2