>>For purposes of taxes, consult with a CPA to confirm this would work for your situation, but you could have the LLC be treated as a "disregarded entity" and thus, even if you and your wife are members, any profits/losses would "disregard" the LLC and go directly on your personal returns. 

It's simply factual:  you violated the lease by smoking, stop it, remove the resulting odor and that a repeat action could result in eviction and loss of security deposit.  

Does anyone have an attorney recommendation in Texas or other recommendations to remedy this loss?

If I move to a partnership, what happens to my accumulated passive losses? 

Unfortunately, I see a growing trend of a lot of service members renting their homes at break even rates or at losses.

I recognize there are other ways I could invest this cash (including another property) but I am being mindful of levering myself out too much in the current environment where job losses are more common in my industry (tech).

I'm not sure why this caused such a reaction, but I can say the language above is completely unnecessary and out of order on this forum.   

My goal while I'm working is to always report a break even or loss until I retire.

You are likely overpaying by $5,000.Broker fee of $3,000 and Processing Fees of $2,000 seem out of place...but then again, i never used a broker to get a loan so I am not sure about that.If the broker was able to get you an interest rate or loan product that you wouldn't be able to find on the open market...its high, but likely fair.if you are getting a loan product that you could have gotten by going to a normal bank...seems high and unnecessary. 

It may be time to cut your losses and move on from this real estate.