My question is that if I get approval from the local town and the property variances are changed would it be allowed to convert said property into a 5 or even a 6 flex without any issues arising from the VA loan lender?

Is it an issue if the area is rural and not suburban?

Not a problem for AZ, but it might be an issue in your neck of the woods.

Having gotten my own inspection we solved all of the issues the next inspector will see (shoutout @Mindy Jensen for that tip.)

In poking around initially here there seemed to be an outstanding question of the asset being owned by an LLC being an issue? 

It's in a pretty "high demand" area in Silicon Valley so I don't foresee an issue selling it, it's more about identifying the replacement property that will be challenging.

If you ever showed up before a judge because a codes inspector brought an issue against you, i think the court would be very hard pressed to prove you don't live somewhere.That's just my opinion.

I have never hit our renovation budget, it’s always been over because of hidden issues found during renovations.

I found an REO with a "special condition" that seems to scare others away but I see as a non issue opportunity. 

Your schedule E tells the story.Could your tax specialist have been referring to some state issue and community property?