There are a lot of thorny issues associated with this transition back to independence.

And to be clear, I don't have any issue with people selling info.

This normally would not be an issue but the cost of the water/sewer is extremely high in this area and specifically because the meter is a one inch, the costs are much higher than a normal 3/4 inch on a non-duplex. 

This issue, if caught early, is probably fixable with out insurance involvement because the deductible might be more than the repair cost.  

I wrote a letter to the HOA yesterday explaining why the door was needed, how security would be very tight, and how the HOA itself could potentially be responsible for any ADA fines/penalties if they are found to the "barrier to access" for ADA as they control the lobby.We have a tenant lined up and obviously this is causing a major issue. 

But I have a client with the same type of building and has a non-conforming basement that he uses as an Airbnb and hasn't had any issues with it. 

As others have noted, it would be a clear distinction to identify whether that person is a true end buyer or a wholesaler.I've personally seen someone sub-to a hard money loan and take over someone else's hard money loan (not assumption but just sub-to) so this is possible.

Their realtor stated that this was a small issue that would be resolved. 

But let’s be real—people use these terms interchangeably all the time, often without realizing the distinctions.

They remain distinct on Form 1040 with different tax treatmentOnly capital losses can offset capital gains (except for the $3,000 allowance)So even though material participation makes the loss non-passive, it's still an ordinary loss that cannot offset capital gains from stock sales on the return.The only way capital losses can become ordinary is upon the sale of your property, and that loss could offset your W2 salary.