It's a huge bummer, and I can totally understand your frustration, especially as a tax-paying citizen.

I have seen to many people try to do taxes themselves and then we have to go back 3 years and amend the returns because the taxpayer either is exposing themselves to audit risk or missed out on a great deduction that would have resulted in a larger refund 

A taxpayer must own a “qualified rehabilitated building” for which they have incurred “qualified rehabilitation expenditures”.

So the IRS calls this a "disregarded entity" and sees you as the real tax payer. 

I assume if the QI is holding the note, this belongs to the taxpayer engaging in a 1031 exchange? 

There are some cases in our industry where the improvement portion of a purchase does not even count towards a taxpayer's 2 tax reporting year holding period.

Each taxpayer condition will be different. 

@Denise Evans If the cert/deed states "Tax Payer's Name (heirs of)" is this a set-up for a voided sale?

@Lane Kawaoka"willing to check the box"...a little dangerous...The taxpayer is ultimately responsible for what's on their return. 

I've read that this statute allows taxpayers to to ignore any "nonqualifying" use of a property that occurs after the last date the property was used as a primary residence.