The failure to file penalty is $195.00 per month per member.  

If you payoff the loan (which is what happens during a refinance, or you happen to have a huge back of cash) before the 6th payment, the lender who originated the loan is charged a penalty. 

First off I would not touch your 401k to get into taxable investment since you will pay taxes and an additional penalty if you decide to withdraw.

You may want to have your tax professional review as you may be signing under penalty of perjury.

I am trying to figure out the best way to sell him the property without incurring a massive tax penalty.

My tenant just sent me their "Declaration under Penalty of Perjury for the CDC’s Temporary Halt in Evictions".They moved in Aug 1.

Yes, just be sure to check your loan terms for a pre-payment penalty.

No prepayment penalty My thought is the Option 2 is superior.

I know some loans charge a prepayment penalty for paying off loans early because it messes with the amortization schedule.

You are in a good state but always do your math analysis and try to look at the prospective projects before you make an offer or at least have a clause in the sales contract that allows you the time (usually 10 to 15 days) to make a detailed inspection of the subject property and possibly back out of the deal without a penalty that will hurt you too much.I know that this is getting lengthy but I have a bunch to say.