My deductible is $1000, so depending on what the issue is I am glad I built up the $10,000 reserve!  

If she does the bank may come after her for the difference between what she still owed and what they got for the property after deducting all of the legal fees.  

Do I understand correctly that one can deduct that portion of your home's property taxes as a business expense that is used for your business?

When I've built up enough equity either by paying down the loan or the value has risen sufficiently I've done cash out refi's to buy properties whole while also trying to keep down the monthly payments and taking advantage of the tax deduction.

Our local bank (with which we hold 1 mortgage) has said because we have only 1 with them we are eligible for 3 more with them. 

Tough to answer but to help make your own determination; the tax "benefit" to RE is basically, thumbnail calculated, your depreciation deduction is basically 3% of your purchase price per year.  

There’s also tax benefits in the form of depreciation that gives me a credit to reduce my taxes and there’s also a mortgage interest deduction.

You may choose to reinvest in other properties but either way there would be no tax.If that property is your primary residence it is not eligible for 1031 treatment.  1031 exchanges are only for investment property.  

Or else you will just have to take it as is and do the inspection, any future damage can be deducted.

I thought of two immediate questions: (1) whether we'd even be able to afford the restoration and (2) whether the property is eligible for a 203k considering there are 2 structures.