If their belongings were damaged or if food spoiled as a direct result of the leak, then I might consider reimbursing them for their losses.

It's going to be a money soak and large loss because it seems like the principal wants to outsource eyes, ears, and skills and is willing to pay someone else to bring their own people which costs 2-4x as much as having some of your subs and eyes on the job.If I had other pressing business concerns, I would sell all of the properties in a portfolio sale, bank the money and repurpose it, and let someone else do it all.

We provide our clients with a profit and loss statement for the entire year when we give them their 1099.

Moving the property to a corporation is horrible horrible advice.Not only does that potentially screw the step up in basis as there would only be step up in basis of corporate shares and not the property itself, but it also locks in real estate losses that can't be passed to the owners.You should consider firing the CPA for giving that advice.

This is due to the fact that we were only looking at properties that don't need big upgrades. as I agree to your point of just jumping in, we want to make sure we don't jump in and then get out to realize the loss we took on it. 

Would they just be passive losses that can offset passive income or can we treat them to offset capital gains from other investments ?

One of the many advantages being classified as a “real estate professional “allows you to offset income with real estate “paper losses “ like depreciation and other expenses.

But everyone's situation is different.I spoke with my accountant the other day and he floated the idea that I should refi my whole portfolio so I could "operate at a loss for awhile".

I have a large amount of passive activity losses on my tax returns which will carry forward (not REPS so can't offset my W2 income) I don't know anyone who retired early/quit W2 at the age of 40 from their stock portfolio.

Please keep in mind that "suspended passive losses" or losses that are generated that are passive by nature, will STAY passive losses, and CANNOT be used to offset active income.