She also was claiming she was living here! My question is this.. Is this legal?
Of course not. Looks like a fraudulent tax return to me. It would be up to the county to bring charges against, &/or sue the owner. By the way, it's surprising that you do a tax return. In my experience, real property tax is collected by a bill sent to the property owner, based upon the assessed value and the mil rate.
And would we be able to Amend our prior year tax return so we could in fact claim the Homestead rebate?
I doubt it. In most all places that I know of, if you don't appeal a tax bill in a timely manner, you are out of luck. Similarly, if you failed to make the homestead claim on time, similarly it's too late. The reason is that the county has already spent that revenue. Where would they get the money to pay you back?