There are obvious benefits to acquiring properties that have permitted work, but I want to see if anyone can explain why some folks allow unpermitted work.

I learned a ton during this process while being able to take some intentional steps to protect my client.I'm going to do my best to explain this without divulging specific details, as I don't believe in having anyone shamed and I do not intend to break my clients' right to confidentiality.The property in question was less than 1 year old, built by a local builder who held full ownership free and clear of any debts. 

Your loan officer has more information than anyone here and they should be earning that 2% and explaining the numbers to you.

I've thought about seller financing, but I'm not sure the seller will understand that and I don't want to scare them (I'm sure I can explain it without using the words "seller finance").

Then I would just explain the decision to the tenant and move on.

Quote from @Ray Nunez: Im happy to explain PadSplit further.

Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.That is the very short summary of what I do.

If you are not comfortable with your accountant or how he is preparing/explaining your return, you may need a new accountant. 

I think TurboTax handled my confusion explained in my question, but I unfortunately can't remember exactly how.

To minimize audit risk, it’s advisable to choose “Other interest” instead of “Mortgage interest” when reporting.Part 2: Forms 1099-INT from Investors to Private LendersForms 1099-INT Explained: Similar to the interest earned on savings accounts, Form 1099-INT outlines the interest that must be included in taxable income.