@John MorganI'm with @Basit Siddiqi: report full rent and deduct expenses.There're many reasons to do that, starting from the IRS audit risk.

And you must purchase at least as much as your net sale.Any amount you purchase less than what you sell and the difference is taking profit in the IRS's eyes. 

Lots of IRS Notices and Rev Rul, IRC codes.

It wouldn’t affect property tax assessments.....they are not based on the subject property sale, but on comps at the end of the year.The seller is trying to commit tax fraud.....the reason he wants to do this is because a title company must report sales proceeds from real estate closings to the irs....there is no “real estate” closing in this case, just the sale of an llc interest and he plans on not reporting the proceeds.

@Paul PassafiumeMost notices issued by the IRS/States are computer generated and not triggered by an actual person.With that said - the computer noticed that the 2017 tax was not paid and automatically issued you a notice(despite paying it but potentially to the wrong year).I think once an actual human can look at the records and see what happened that they will waive the penalties and interest.Normally interest is not abatable as this is something the government was entitled to.

Also you may also want to consider the self-directed solo 401k.Following are the similarities and differences between the solo 401k and the self-directed IRA.The Self-Directed IRA and Solo 401k SimilaritiesBoth were created by congress for individuals to save for retirement;Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;Both allow for Roth contributions;Both are subject to prohibited transaction rules;Both are subject to federal taxes at time of distribution;Both allow for checkbook control for placing alternative investments;Both may be invested in annuities;Both are protected from creditors;Both allow for nondeductible contributions; andBoth are prohibited from investing in assets listed under I.R.C. 408(m).The Self-Directed IRA and Solo 401k DifferencesIn order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;To open a self-directed IRA, self-employment income is not required;In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;The solo 401k allows for checkbook control from the onset;The solo 401k allows for personal loan known as a solo 401k loan;It is prohibited to borrow from your IRA;The Solo 401k may be invested in life insurance;The self-directed IRA may not be invested in life insurance;The solo 401k allow for high contribution amounts (for 2018, the solo 401k contribution limit is $55,000, whereas the self-directed IRA contribution limit is $5,500);The solo 401k business owner can serve as trustee of the solo 401k;The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;Pre-tax IRA contributions on reported on line 32 of Form 1040;Pre-tax solo 401k contributions are reported on line 28 of Form 1040;Roth solo 401k funds are subject to RMDs;A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.)

@Jose Ortega The great thing about any type of repair or reno you do, it is covered under the IRS Tangible Property Regulations.

Im sorry to hop around like that but it is what is...So in a quick recap of my last post...

To me, it's kind of like hopping into a car and trying to drive, before you've had a single driving lesson.

Hoping she hops on and chimes in.