I wanted to obtain a rental to gain passive income.

Immediately filed tax appeal based on the closing price, won and reduced the property tax.

It's a great sign that the tenant is *asking* you before letting his girlfriend move in so you should treat them as any other tenant application: - credit app- background check- income check etc. 

Even though we have a history of rental income at that property and a 2yr lease in place.

If you are audited and the IRS looks at your 1031 and there is only your word against your actions, you're going to lose the audit.I totally get you wanting to avoid those nasty ordinary income taxes. 

Find other ways to reduce your expenses.

However, looking to leverage real estate to generate income and or future wealth.

Sure, what you do will affect those latter two, but nothing about the realtor.Perhaps with in your setup the lawyer and accountant may need to confer, but the accountant will prepare the return according to whatever income/expenses you provide and whatever legal structure your lawyer puts together for you. 

Hint: if there's only one box for the rental income then enter the combined rent from the purchase price.

I don't believe we will see 2-4 again any time soon, so with 5-7 being more likely, you could do a reduced leverage cash out, reducing your active rate but giving yourself some capital to hopefully purchase some new cash flowing properties with reduced rates that wouldn't have been possible before.