If they exit now, they'll lose a lot of money.If you take a long term approach, and treat it as a business, then the investment is superior to the stock market.Gino

We treat section 8 tenants the same as any other candidate who applies.  

If the tenant violates the lease in other ways by how the treat the property issue them a notice to correct and if they don't correct the issue you COULD try to evict, BUT I would make sure the issue is VERY VERY clear cut because I have trouble believing a magistrate will allow an eviction for petty things or something that isn't 110% clear to everyone involved. 

So, that if they don't pay that utility bill with their next rent payment you treat it as unpaid rent and move to evict based on that.

Do not treat them any softer or harder because they're you're neighbor.

You are treated as a "student" trying to gain "admission" to their program. 

There are seven tests, however the most relevant tests for STR investors include:Perform substantially all the work related to the activity.Participate over 500 hours during the tax year.Participate over 100 hours during the tax year and no one else participated more.If your property meets one of the exceptions above AND you meet one of the above tests, you can qualify to treat your rental activity as non-passive.

The “STR loophole” allows them to treat rental income as non-passive if they meet material participation and other requirements.Can an STR unlock PALs from LTRs?

Since you’re considering Tahoe, where you might use the place as a short-term rental when you’re not there, it’s also good to outline how you’ll handle personal use versus renting it out.I’ve seen folks succeed with this by treating it like a business, even if you're all friends.

As far as how you move forward from this, if you are confident in the area and acquiring a new tenant that will treat the property better, you can view this incident as a sunk cost and move on that way.