Now I am not impartial to Sub2, after all I did write a course on it and have purchase a ton of houses using the method...

The Buyer(s) & Seller(s) nor their Agent(s) listed below have any agreements (written or implied) that will allow the Seller(s) to remain in their property as renters or to regain ownership of said property after the successful execution of this short sale transaction.†HUD/FHA/VA, Fannie Mae, Freddie Mac & FDIC are now carefully auditing short sale transactions going forward and are also looking at past closed short sale settlements that may have been considered non-arm's length transactions.

If there was an audit by one of the GSEs they wouldn't see the entity owned the property either.

The IRS leaves everything up for interpretation, you would have to prove your not disqualified by an ERISA attorney letter which no attorney will sign off if audited Seems crazy but If it's a gray area probably not a good idea

We have had a handful of clients audited and the self-management of the LLC has not been an issue.

We can also assume that under audit, these deductions will likely be challenged and it will be up to you to defend the deductions. 

That is why (as suggested above) I thought perhaps an Attorney can impartially explain and suggest what to do.Thanks a lot for suggestions

If audited you will have to pass the sniff test.

I know that when it comes to an audit, the IRS requires 85% of audited expenses to be accounted for as an example so you are still within that allowed 15% margin of error so to speak.

Sounds illegal, or at the very least a good way to get audited.