An update,I was leaning toward the SFH without seeing it inside as I know the layout, I know it needs floors and wall work and so on.

The home is in need of renovations but not the tenant side , which was updated to newer finishes 8 years ago.

I would love more advice and I will keep this post updated until they vacate / the outcome. 

He told me I can't take any home office deduction (I'm interested in the "simplified one" $5/sf) because I'm not a Real Estate Professional (750 hours spent or half my regular business time).

She says that she owns the property outright and has put money into the house so it needs no updating or work. 

The person doing this out of the house charges less money usually is how they get business over the regular day care places.Even if they have insurance on the business part your insurance company for your property likely will not allow it.

My guess is that you have not been doing regular/quarterly property inspections.

Are they actually doing an appraisal update (1004D) or a discounted new appraisal (1004/assuming this is a residential single family)?

Any person, partnership, association, corporation, entity, or their regular employees, who as owner or lessor perform any of the acts enumerated in §§ 54.1-2100 and 54.1-2101 with reference to property owned or leased by them, where the acts are performed in the regular course of or incident to the management of the property and the investment therein."

Please keep us updated on your progress.