You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner.

I declined and suggested they move forward with the bid they felt most comfortable with at their own expense but they then seemed to threaten legal action in a veiled manner citing their understanding of Minnesota state law which they feel puts the duty for pest removal on the landlord.

Since we would be using the money in the same manner could we use a 1031 exchange to defer the gain income tax ?

Tenant is responsible to pay all water bills and inform me of repairs and maintenance in a timely manner.

. - I finally said that I was going to hire a mediator, per our JV agreement if we came to a deadlock (he kept telling me I'd get paid back every month, then every week over and over again, refused to respond to my texts, calls or emails in a timely manner or at all, and refused to agree to any reasonable compensation for being so late on his loan).

A mixed approach may be the best path forward since the inspector is coming nearly weekly, but agree long term positive reinforcement would be much more sustainable.

The reason why I am unsure of this scenario is that I know the theory states that this is usually a non-owner-occupied property (someone buys a single family home close to their primary residence so that they can manage it and take advantage of the loophole in this manner). 

This is not sustainable.

I'm looking for reliable and fair valued architects, engineers, contractors, etc. that can do good job, and in a timely manner.3.

It's may also not be sustainable as compared to Long Term Rental.On the average: If you do a great job at Tenant screening, One Tenant can live you your property for 8 years.