Just a heads up this will not be tax free, it will be a pro-rated exclusion.

I am not an insurance agent, but I would be curious to hear from someone in the field who could explain how this would have played out differently had the properties been in an LLC and not a personal name.

Sounds like he will be the "GP" and you as parents will be the "LP".

Quote from @James Jefferson: Hi, I have a family member that had a reverse mortgage on their property it's a 3b 1b 1 acre of land heats by oil no hvac and on well water.

It's under S corporation, has a bank account, and funds are being used to construct.     1st project for us. will speak to my CPA this week.But wanted to ask bigger pocket community how to go about re:  filing the taxes. 

So losses from that specific rental may be utilized.  

Unless they wanted to say that the units in those areas could not be rented at all, then to me its absolute nonsense. 

.$2k per unit with 4 units ($8k total rent/month) that only needs $60k in rehab should be selling for a LOT more than $275k.

You are deciding between buying a multifamily or a large home and renting rooms and asked the pros and cons of buying a large home and renting rooms.The first thing you want to consider is zoning and how the local government regulates rentals.Some communities limit the number of unrelated people who can rent in a property.Once you confirm how many people can rent in a property you want to have a local title company look at the deed and covenants that may limit the number of unrelated people who can live in a property as well.The pros are a property may check out that you can rent to a reasonable number of people in the property and the cost of the big house may be less than a multifamily offering a greater ROI and you are using the property for its highest and best use adding value to the community with affordable housing.To Your Success!

Might be better to save money for that property rather than put it all into one egg.