Let's continue reading:...Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property...Don't you think that this is the description of the initial rehab on a rental?

I agree with your analysis, a foreclosure or default does not always lead to a short sale automatically, it is simply another option for disposition of an asset. 

Keep in mind, attorneys can be compensated through fees collected from an acquisition or disposition of a property.Escrow Officer or Title Rep—If you live in a state that uses title and escrow companies, your escrow officer or title rep will be the person responsible for closing the deal, taking you from the offer to the keys.

You can find an easy invoice template online, but typically a deposit disposition is all that is required in most states.

The GP can charge also an acquisition fee, asset management fee, loan fee, and disposition fee.

But you will have two dispositions of two parts of the property, one per schedule, with possible complications, as the tax treatment of the two pieces is not the same.

And the security deposit disposition letter still has to be sent out even if the security deposit has been depleted correct?

Standard amortization schedule including interest/principal with balloon payment at 12 months or paid in full at disposition of the property. 

@Snehann Kapnadakactually, you could avoid the if-then statements just be referencing the year of disposition as you have already done it appears (I'm looking at the number "7"). 

ChandlerIf you do end up deducting anything make sure you send her a disposition of deposit form.