I know you are trying to "help" the homeowner by allowing him to rent the house back and share in the future profits, but this sounds like one of the exact situations those CA laws were developed for.

Does an LLC from another state have to register as a foreign entity in NY to own and rent residences?

They’re trying to scare you so they can stay rent free. 

We are open to it being rented out or bought for an assisted living space.

You got bad advice from your prior accountant.You received rental income and it should have been reported.it seems like maybe he was lazy and/or doesn't understand rental concepts.The only exception is if he is paying 'under-market' for rent in which case the property would be considered personal use.I would fix the issue and charge him market rent. 

So kinda a dice roll here.And since you are planning to rent this out, and you need certificate of occupancy for that, you can't just go and build without a permit.  

@Bob Mai wow, interesting how biased your post is.Their 4% is only if you PREPAY their fees for 12 months, otherwise 6% monthly.They have a minimum of $75/month, which means if your property rents for less than ($75/6%) $1250/month, you will pay more than 6%.They use Latchel for maintenance issues - Latchel is not cheap and there's a kickback in there somewhere.There's a list of extra fees for extra services and there's a lot they do not handle.You get what you pay for, so good luck.

Self bio: 19single single-family homes rented and self managed all local all BRRRR style, cashflow avg 320 per home.  55% dti.

And as I talked about in Bigger Pockets Podcast #82, imho capital gains tax should be indexed to inflation.

We inherited a house near the Blue Oval City project and listed it, but it's not selling as quickly as we'd like. Should we hold out for a better offer, or take a cash offer now? Any advice is appreciated.