There was some questionable electrical that was exposed when we started tearing things apart so we felt that rewiring it would be the best course of action.4) We originally planned to refinish the hardwood in the living room and bedrooms, but after some consideration, have decided to install new flooring throughout the entire house. 

I wouldn't sell them a inch of my property, and I wouldn't do a easement without plenty of compensation.. for them to tear off part of the deck is what might be needed to be done.Why wasn't this found out when you were purchasing the property,, I'd check with your realtor about this issue,, title search,, and see if anything can be done thru them also. 

I found a lot with a SFH home on it, but its been zoned for a Multi-Family.How could I execute a purchase, tear-down, build.I want to purchase the house for say $150K cashtear-down the propertybuild a new duplex(MF)refi into a VA Loan.FYI my goal is to use my VA Loan at whatever stage of the process to best minimize my cash outlays.The tear down in Question is in Troy, MI in the Athens High School boundaries

Some repairs are considered normal wear and tear, eg. depending the length of the tenancy you might not be able to charge for painting the interior of the house, cleaning (or even replacing) the carpet.

You are not able to charge for regular wear and tear, so unless it's a real damage you just need to pay for it. 

Tear down and build new?  

Hopefully, you'll also get the "walk through checklist" - in the event this tenant left the property in "less-than-similar" condition to when moving in (Note: You cannot deduct for "normal wear and tear.")  

And if you itemized and have receipts for all deductions taken, then it just comes down to the judge's decision on whether you are taking money from the deposit for what might be considered normal wear and tear vs damage.Maybe @Chris K. can weigh in with his opinion.

Would you approach from a Gut and rebuild or is this better suited for a tear down? 

Renting might make sense, but honestly, if the market gets better, maybe it works, but if the market drops, and the renters wear and tear the place, it could make things worse.