(which appears to be what question you're actually wanting answered)*Insert generic "I'm not a lawyer, consult your own professionals" statement here*First, I have all tenants fill out a worksheet that indicates what type of animal it is, including generic information about the dog such as name, age, breed, and who does the dog assist (if not readily apparent and there will be multiple people residing in the house.)

What would you do in this situation and what would you tell the prospective tenants?  

How should I go about the situation.

Any suggestions on how to deal this situation with using the same property as primary residence + rental + short term rental ?

How do I decide if its better to keep renting it or to take the equity out and diversify into multiple properties with more cash flow?

Rentals come back with issues when tenants move out just like foreclosures.It's never a great situation to take a property back.

Hi everyone, A bit of a unique situation.

My first red flag was when you said partners - one partner is already bad enough, multiple are a recipie for desaster! 

It's designed to prevent taxpayers from deducting passive losses against non-passive income, which often leads to situations like you've described.Your concern about potential double taxation on the $2,000 net income is valid.

It's a difficult situation all the way around although sometimes the choices we make create our difficult situation.