This introduces the possibility that a resident can live in an illegal space indefinitely for free. 

These are very smart people who can prolong the process indefinitely. 

Indefinitely tax deferred if you decide to use it as an investment. 

You could also do a 1031 exchange and indefinitely defer all the capital gains tax.

Most investors don't want to part with their money indefinitely.2. 

@Timothy Lin  The idea of the 1031 exchange benefit is to allow investors to use the capital gains tax they would otherwise have to pay when selling their investment property, And keep the profit from the deferred tax in their pocket.You get to indefinitely defer it into any type of real estate that that might meet your needs better. 

The 1031 allows you do that and keep the tax indefinitely deferred.  

I thought I was getting an amazing deal but what I'm ending up with is; essentially locked into closing on house where everyone expected the current tenant to leave cooperatively however, he is now planning to stay indefinitely without paying rent until getting evicted.

Also that aggregate losses can exceed 25K over multiple years and carry forward indefinitely to protect future “passive” income.

Tenant protection issues - We’re in CA and introduction of limits on rent increases so want to be sure that we have the lease structured so the tenant reverts to a market rate rent at the end of the 3 year period or moves out if unwilling to pay that rate.I’m struggling with the 3 year lease being long, I don’t think I could enter an indefinite (til death) lease.Another thought what if one spouse dies and the survivor remarries a younger person?