Does anyone know what you have to do on a tax return if the assets were incorrectly entered for a rental unit that actually belongs on another rental unit? 

It seems this market is ideal for cash flow, as rents seem to easily cover mortgage, taxes, and more with plenty left over for profit.

At a minimum, I recommend selling it within three years of renting it so you don't lose the tax free gain on sale of a primary residence.

Selling yes. 1031 in a perfect world yes.If you can find a property and meet the time lines then yes.I have done a 1031 and it worked out great.I have also just sold paid the tax and put the money in the bank to have working capital to deploy on my timeline.

I don't include any "tax benefits" in cash flow calculations.2.

You can look them up on your county site: foreclosures, divorce, death, auction, tax liens.

Here is a site LA county site for the Tax Auctions:  https://ttc.lacounty.gov/schedule-of-upcoming-auctions/HTHS

This is important to me since construction is super expensive here in CA, and I have a bunch of other 1031 properties I could sell to convert into the newly constructed property to reduce the loan burden after.  

The amount my tenant is paying me per month only cover 95% of my mortgage, HOA, and taxes. 

My understanding just from my own research is that if it's a direct threat to health and safety of others or causes landlord an undue financial burden, like your insurance won't cover the breed and you can't find insurance coverage without substantial cost increase, then you may be able to deny it, but your property management likely knows all this and they apparently said it's legit.