The turnover rate was about 100% annual due to relationship breakups, prison sentencing, job loss, disqualification of benefits, etc. 

If you use a HELOC for property improvements, that interest may also be deductible.Passive Losses: If your adjusted gross income (AGI) is under $150K, you may be able to deduct up to $25,000 in passive losses.

That means:Depreciation recapture under IRC §1245 is triggered at the time of sale.You’ll pay ordinary income tax (not capital gains) on the depreciation taken on these components, including bonus depreciation.Even if the replacement property has similar assets, the IRS treats them as newly acquired, so the prior depreciation is recaptured and taxed.Tax mitigation strategies:New cost segregation on the replacement property to front-load fresh depreciation that can offset income (especially useful if you qualify for REPS or STR material participation).Strategically use suspended passive losses or time the sale during a lower-income year to reduce your effective tax rate on the recapture.Consider installment sale or partial exchange structure, if applicable, to spread gain.Let us know if you'd like our downloadable 1031 exchange, we can send that over to help you build out your roadmap.This post does not create a CPA-Client relationship.

House hacking with MTRs (30+ day stays) offers solid tax benefits, depreciation, pro-rata deductions, and no self-employment tax, but lacks the aggressive STR loophole advantages.Key Tax Differences:MTRs are passive (Schedule E); losses can’t offset W-2 income unless you qualify as a Real Estate Professional (REP).STRs (<7 days) allow losses to offset W-2 income if you materially participate, even without REP status.MTRs face fewer IRS red flags, and you still benefit from depreciation and deductions.MTR house hacking is tax-efficient but less powerful than STRs for offsetting active income unless REP rules are met.

While some insurers might still issue a policy that covers the building as a whole, claims can be denied if the loss is connected to the unpermitted unit or if the insurer determines that the existence of the illegal unit was a material misrepresentation.

I will require 2 months of rent from you to make up for my losses/increased costs if the sale falls through. 

They won’t last long when their losses pile up.  

Real talk…I’ve noticed many agents (some who’ve I’ve met here, no shade) are annoyed when I ask for numbers on a property.

And again, it's not a true loss, it's a paper loss.

Perhaps in a situation in which you were responsible for re-leasing they could state the case that your efforts (or lackthereof) caused a loss of income for them, but in this case, I think you're correct.