Determine how much it will rent for, then deduct all your expenses.

Is there a step up in basis for the husbands half of ownership, will there be a $250,000 or $500,000 homestead deduction, and are there other mechanisms in play that I may not be aware of?

I know if you call the agent sometimes they ask you what you think the damage will amount to and advise you against filing a claim if it is below your deductible but I don't know of any falling branch exclusion.   

The IRS says "Hey, if you operate this like a real business then you can deduct losses."

Personally I deduct the amount of the background check(s) from the first month’s rent but absolutely no one else does this.

@Ben Zimmerman and @Theresa Harris both made great points above: cash flow can only be determined after calculating and deducting ALL expenses, not just the mortgage (including insurance (hazard & flood), taxes, vacancy estimates, maintenance/repairs, and more.

Is this something I can deduct from their security deposit if there is more damage due to them not notifying me immediately? 

So, if you 1031 into an asset worth $700K or more to fully defer taxes, you'll have around $240K or so to put down (there are fees and deductions so these numbers are general). 

These include depreciation and all expense deductions. 

Assuming they passed all requirements for the deductions, what's the chance of an audit?