If you foreclose, you'll spend 6-12 months on a borrower like this before he files BK to stop the sale.

Now it takes that long to get the paperwork filed, including 2 years tax returns, an appraisal scheduled & some random underwriter to tune in a month later with more mundane questions.

Filing status – would need to figure out his filling status single, married, head of house hold.4.

They keep the $$ upfront at sale closing to force you to file a non-resident state return to get back all or whatever portion of the proceeds you are entitled to.

You'll want to make sure they file the correct forms to deduct these amounts from their lifetime gift exemptions.

Additionally, if you're filing together, your spouse must materially participate.

Is it filed as a Schedule B? 

As far as I know, direct ownership may file income tax differently from a LLC member. 

To do this I have to go to the county recorder's office and file a Promissory note and record it with the office, much like a traditional mortgage.

If you don’t disclose and the buyer or seller finds out later and decides that you “took advantage of them” because you offered below market value they can file a complaint which could lead to a fine and loss of your license.