If the daycare violates local laws, report them ASAP. 

What I mean by this is that the way public companies have to report about their operations isn't up to them, in the U.S they have to follow GAAP [Generally Accepted Accounting Principles].

The report by the numbers:$585,000 -- median detached home price.

However, in 2014, he added a patio cover to the 2nd floor and unfortunately someone reported him and the city slapped him with code violations for the patio cover.

Ultimately, we countered with language that said we were not giving up our rights to cancel the deal if the inspection report was unfavorable. 

In my mind, this will make it difficult for me to make a case of keeping their initial deposit if the unit is trashed.My thoughts were to slightly increase rents 3% - 5% and have them complete a conditions report prior to renewing a 1-year lease.

@Kwame EssiehYou may be required to report an increase in taxable income if you sell appreciated stocks.You may want to see if you have stocks that both depreciated and appreciated in value so the net income aspect is close to $0Best of luck

My question is what's the best way to report my income on this and also reduce taxes?

You don't state how the vesting was when you transferred- get a title report now with history back before you purchased and see how it was transferred to him.   

Luckily structural/engineering reports came back great and inspections didnt call out anything significant.The numbers:Bought the home off market and paid my real estate friend to set up all the contractual information and represent me.