I have read that the interest on cash out financing may not be deductible.  

However the load bearing wall also has the sink/dishwasher on that side, so the inspector will most likely deduct that we are also planning some plumbing renovations and will require permits.

The buyer ended up paying to convert it back to a garage, permits alone were 900, my services ran around 7k for the conversion, he said he deducted 10k from his offer, just in case something had gone wrong with the living space, this case, he covered everything on a worst case scenario.

Also, you do not lose your ability to deduct depreciation, mortgage interest, and other expenses when you leverage.

As an individual, you get standard deductions and personal exemptions in addition to your business write-offs and the first (for MFJ) $18,000 is taxed at 10%.In a C-Corp, you lose the favorable treatment for capital gains.  

With paper losses, tax deductions and appreciation, imagine the numbers a year from now?

Tell them you're entitled to the deposit because he broke the lease and that you are actually able to go after him for all the damage he's done PLUS any vacancy period up to that 4 month period.From a legal standpoint, you could total up the damages and deduct that from the security deposit.

Like a tax-deductible "business trip" to Maui!

Thanks Guys, One idea that came my way was that if the buyer performs then the option fee gets deducted off the purchase price at closing.  

You could be your own insurance so to speak.I also shoot for pretty high deductible insurance as well (currently $5000 on my triplex), I'd actually go higher, but I'm not financially able to take a $10k hit out of pocket yet.All the best,