Insurance claims are never fun and with being in an HOA certainly makes it a bit more complicated.  

You can claim depreciation on the owned property and this can offset the income from the property.

Today, that is still only Jefferson County, although Madison County is gaining on them.If you take the risk and take possession of the property, and hold possession for 3 years after the tax deed date (6 years after the auction in your case) then your "short statute" adverse possession of 3 years will defeat any heir's claims the tax sale was void.

There would be no way for you to prove that this claim WASN'T true, unless you followed a more rigid protocol and documented it. 

Currently, The average homes sell for about 2% below list price and go pending in around 29 days.Really nice homes can sell for about 3% above list price and go pending in around 9 daysTo get the best deal - buy off market not retail overpriced MLS properties listed by Realtors who receive their listings only because they gave the seller an overinflated, unrealistic price - These properties languish on the market and then get reduced to a price that's more in line with reality -and above all DO NOT use a Realtor !

If you would like to see the guidelines for IRS auditors regarding Cost Seg, you can find them starting on Page 24 of this document https://www.irs.gov/pub/irs-pdf/p5653.pdfI would be very surprised if you could claim unpaid labor in your Cost Seg. 

I see both sides of this debate have all had valid claims.

I intend to take pictures of every part of the house to thoroughly document the condition before we move out and send those pictures to the landlord as a proof so they cannot claim anything false after they move back in - is that a good idea?

@Austin Bright Texas is currently seeing very aggressive premium hikes due to several large insurance companies pulling out of markets and due to claims for numerous storms and natural disasters (hail, hurricanes, Houston floods, etc).

Very unrealistic.