If you no longer feel the place is up to your standards, then cancel the lease (pay the penalty) and find another place.

The issue related to habitability is likely mold due to the water damage.

The house is not on a water.

I know you deduct the standard 1/27.5th of the improvement value, $200k. 

Purchase price: $65,000 This property was a classic grandma home that needed some TLC to bring it up to modern standards.

Wildfire risk is also nearly non-existent close to the coast, and haven't yet heard of hurricanes or tornadoes, but you will notice a tsunami sign or two..Electricity, water and general operating costs are surprisingly 'affordable.'

Not all people have high standards, or the skills, or the knowledge. 

Somewhere between $3,000 - $5,000 is pretty standard.

I can't imagine one of these fitting into a standard house, unless it was a ranch with a near direct shot to the bathroom.

The most pressing, and i cant seem to find a true answer from the the building department OR the utility companies is if I need to have separate meters (Electrical, gas, water) for my ADU and main home.