The difference is pretty substantial and I am planning on correcting the past 5 years of returns and submitting the amended returns to the IRS.I have not received any additional deduction to ordinary income during this time as I do not qualify (joint income is > $150k). 

Sounds like your three addresses are result of a completly innocent situation, but anything out of the ordinary is a red flag as to (a) mortgage fraud or (b) illegal monry transfers or (c) tax evasion.A letter of explanation may be enough; it will be up to the underwriters interpretation of compliance regulations.  

If your intent in buying a piece of property is primarily to resell it then you can't 1031 and you pay ordinary income tax which probably included SE tax and Obama care tax - could be as much a 40% of his profit.The best way to use 1031s is to think of them as your portfolio builder.  

When you flip a property, you earn a one time income, which is taxed as ordinary income. 

It WILL NOT allow it to offset ordinary income. 

She reports back to us if she sees anything out of the ordinary.

@Brit Foshee!

In addition you'll loose the capital gain treatment on the sale of the property because when you take an IRA distribution it will be taxed as ordinary income.

I'm late to the party on this post, but the only thought that crossed my mind regarding the seller's interest in beefing up the price is that he will still be on the hook for ordinary income tax on the difference between sell price and mortgage loss.

Perhaps you want to consider amending your returns and reporting the income as ordinary income.