This stunning remodeled home is ideally situated minutes away from the beach and boasts a beautiful rooftop deck.

Is there going to be a cash flow positive situation??

If you didn't, I would take a little ownership of the situation as well.

Is this typical when it comes to fix-and-flips and how should I approach and solve this situation that I am in? 

I would read through each of the responses and pull out what makes sense in your situation.

BUT, it does mean that sophisticated lenders believe that THE CHANCE of default in said situation puts the loan beyond the “risk/reward” parameters that they’re comfortable with.  

I would suggest getting with a tax professional to assist you since there's a lot of variability depending on your specific situation not only on a federal level, but with state reporting as well.

This home had the perfect layout for a house-hacking situation.

Norman,The policy I used most often on the fix & flip situation you described is a "Renovation Builders Risk" policy.  

Maybe I am worrying about something that is no big deal, but would like some input from those of you with experience with this kind of situation.