As far as your primary residence, if you have lived in it 2 out of the last 5 years, you should not have to pay taxes on capital gains (difference between what you paid for it & what you sold it for) up to $250,000 if you file your taxes as an individual and $500,000 if you file jointly with a spouse.Just a disclaimer, I am not a tax professional.

If you were able to increase the value of the property significantly after the rehab, then you could bring the deal to a community bank  to refinance and take the hard money lender out.You keep all the equity and don’t have to file a partnership return for your annual tax return, which can be costly.  

Any taxes not owed, a seller merely file a tax return with the state, just like any other tax returns filed for extra taxes a government has with held. 

This attorney should handle creation of your PPM and state filing requirements, but they do not handle the PSA or closing. 

It is also the seller's fault for accepting it, they full well knew this was not right.If you were to file for eviction for non-payment of rent, you'd probably win.

If the seller files for bankruptcy, that will involve you in a legal proceeding.

Aloha @Keith Barham, yes its geared for Lenders and Agents, however,  it works well for Real Estate Investors too! 

They don't seem to realize that this is a financial organization. 

She was paying rent when there was a landlord that would file for eviction.

However, these properties generally have a lot of land improvements that qualify as well as certain portions of electrical, mechanical and plumbing that can qualify.