Sure, cut the security deposit check - AFTER deducting any rent owed.The reason most landlord can't afford to forgive rent payments is precisely because they are not the size of a bank.And I disagree that this is a "relationship" business.  

there is a very precise way it needs to be calculated using the useful life left of the damaged item to calculate the amount you can withhold for example if carpet was damaged and the useful life of the carpet was 5 years and the carpet is 5 years old you cant charge them at all    To answer your question I would create a deposit accounting and describe in detail what you are charging for .  

I tell them I don't want anyone living in my properties that doesn't want to be there, and that is precisely what would happen if they signed a year lease and their situation changed.

I think Southern California (my area) is precisely the "most affected" area of which you speak, hence the trepidation of engaging in current flips. 

@Benjamin Aaker is on the money.Your income probably prevents you from using RE to offset your W2 income but you can still use deductions and depreciation to offset rental income.If you are looking to REI to reduce your taxable income on your W2 earnings REI won’t help much at all.One needs to be precise when discussing tax law.

@Kevin Wood thanks for your tips. that's a more precised and works for me. :)

The tenant probably kept it under their hat, precisely because they have seen the kind of toxic reactions which appeared in a flood at the beginning of this discussion.

Will I know with precision the FMV of my investment 5yrs, 10yrs, 20yrs down the road?  

That is precisely what I'd like to do and, frankly, what I enjoy doing.

Would we - or more precisely a U.S.A. entity owned by us - be eligible to purchase this property or is it only available to a "natural" person who happens to be a U.S.A. citizen?