Not understanding that through TROs, bankruptcy filing, and state foreclosure laws a defaulting borrower can tie up a property from 18 months - 4 years WITHOUT making a payment4.

But since this is mixed use and a single structure, they'll default to other ways to demonstrate correct intent (rental income,  depreciation, length of hold, etc.) 

Many other attorneys by default recommend that their client has their tax advisors review the agreements prior to execution.So...they should be, and most tax advisers want to be in that room when the documents are being drafted, but we can't help when no one tells us what is going on. 

Also, what protections does the seller get in case we were to default on payment?

If the tenant defaults on the payment plan agreement than you can go back to court.

Were talking EPIC crazy WAY-out there stuff and truth is that stuff happens you will be more worried about where you get your next meal than your dang real estate, EVERYONE will be in default. 

by default, the K-1's will be treated as passive unless you can show that they are not passive.If they are passive, they would not be eligible to offset your W-2 Income.

We also plan to have a performance deed that will help protect me in the event he defaults and the property will be handed back to me.

In my state, if contested, a defaulting party can often stay in the property for two years. 

Hope this helps https://www.ftc.gov/sites/default/files/documents/one-stops/...