@Alicia JohnsonThe answer is maybe, as you probably expected.As far as how hard it would be to prove - remember that the IRS requires a detailed time log, created as you go (as opposed to reconstruction during the audit).

Constructs or reconstructs it. 

I didn't read this to ensure its accuracy but it certainly looks to be from a credible source. https://www.irs.gov/pub/irs-utl/33-Real%20Estate%2...Cliff Notes:Real Estate Professional Qualification • Material participation in each specific rental • Material participation in separate Real Property Trade or business • 50% rule • 750 hours rule • 5% ownership ruleReal Estate Trade or Business Defined IRC Sec. 469(c)(7)(C) Any Real Property: • Development or redevelopment; • Construction or reconstruction; • Acquisition and/or conversion; • Rental Activity that is not a Passive Activity; • Property management; • Brokerage activities.Example 1: Laura owns 5% or more of a real estate sales office • Works full time as a broker • She owns 3 rental properties and: • She finds the tenants; • Approves tenants and leases; • Approves and oversees repairs & improvements • Net rental losses are $31,000 and her modified AGI is $160,000 before the losses • Deduct the full $31,000 in the current tax yearExample 2: John acquires old homes and contracts 3rd parties to renovate and ready for resale.

I would read that town ordinance and call the rent control board. if they are behind on rent and also you do major reconstruction you should have some out.

The idea would be for the tenants to pay for the Reconstruction so I don't need to go to the bank and pay for it out of my own pocket just to get it back when I sell it .  

Replacement Cost values themselves are derived using appraisal software by your Agent and the Insurance Company, or an appraiser, but they are not market value estimates, they are reconstruction cost estimates.

Apply the same ratio to the current value of the house to reconstruct a reasonable basis.

So the property owner would be compensate 300K in actual cash....if you'll notice our client would have been out of pocket for 200K after getting their payment and then paying for the re-design and the reconstruction needed.I tell you that to say that our client's attorney argued the point, provided case law, and (I believe) had their own appraisal to demonstrate a value that was more in line with what they considered fair.

The advantage to your strategy is that one could argue that in five years the majority of the reconstruction will be behind us and theoretically there could be more trade labor available at that time. 

I'm not sure if Indiana offers a non-NFIP insurance option or not but if they are like Ohio than NFIP is your only option... however not all agents understand how NFIP works or how to give you coverage options.If your main goal is checking the box for flood insurance at the lowest possible cost I would suggest asking the bank what is the least amount of coverage  and what is the maximum deductible they will accept - then get an agent to quote it that way.I'm NOT saying this is a good idea to insure your property this way - you really need to investigate the risk and talk with your agent on what your level of risk tolerance is.Many agents will try and quote it at the full reconstruction cost amount like it's an owner occupied property.