Not sure what steps I can take to mitigate my losses.

Sure, we all want that short-term tax loss to offset other income, but ultimately you want to make money.However, in Grier v.

If at the end of the year I have ended up not making as much as my expenses is it technically considered a loss or since I own the house, has the house provided me more income?

The potential for loss of rent and damages could be way worse than the small price of vacancy.

But since J properties generally depreciate over time (not like properties back home which appreciate), the idea of sinking cash into a property that is worth less five years from now is not terribly appealing.Like you say, then the question is what sort of yield can you get, and will it cover the deprication losses?

My wife and I had a loss during 08 meltdown, so she now against investing.  

If I were to sell and build the two smaller houses, I could likely fund them enough from my gains on the current rental (and a little out of pocket) so they also cashflow ~$300-400/mo each.So, at the end of the day It’d be a wash or a little loss, cashflow wise, on one house and I’d gain ~$300-400/mo on the other house.

See attached Excel summary sheet.Investment Highlight89% Physically OccupiedSupply Index in a 3-mile radius of 6.8 SF/Capita, 5-mile radius of 7.7 SF/Capita, and 10-mile radius of 8.3 SF/CapitaAdditional Income generated from 4 mobile home lots and 1 mobile home (Not Verified, as thus not included in underwriting assumptions)Key Underwriting AssumptionsDown Payment 25% of Purchase PriceEstimating a CAPEX/Repairs cost of $150,000Estimating Operating Reserves of $10000Stabilized Vacancy and Concessions/loss to lease at 10%Using a cap rate of 7.23%Key Demographic DataTotal Square Footage 21,130 Supply Index: 6.3Population 3,338 1 Yr.

You own the LLC, and just like any other business and the income/loss of that business will factored into your debt to income. 

As mentioned above, USDA will not make you refinance into a loan if you want to rent out the property, but they do issue some warnings.When a property is no longer occupied by the borrower as their primary residence it will affect their ability to refinance the mortgage with USDA or continue to be eligible for servicing and loss mitigation options.