@Jim Macedon The contract should have all this laid out and will be the "go to" if something out of the ordinary happens.

First, it's not gains....it's ordinary income, with self employments taxes (SS/med).  

I am biting the bullet on the last flip and will pay ordinary rates, I have a good use for the money so the tax cost isn't my biggest concern.  

Deficiencies  were outlawed during the crisis but that has sunset.Also the lender once they do this can do a 1099C which delineates how much they lost and its EARNED ordinary income to you.. so now you have federal tax issues to deal with.. so thats the bad that can come from strategic foreclosures.. they work in CA OR WA NV AZ those states i know for OWNER occ loans its against the law to seek a money judgement but you could still have the 1099C issue to deal with although in those states if you bought after the crash your probably not running into the issues you describe above. 

However, a negative in relation to state taxes is that if you are distributing dividends from a C-Corp, states typically don't tax this at a different rate than ordinary income.I will say that IN GENERAL, I would still stick to a pass-through entity.

What are your monthly costs on your Texas property minus the large expenses that are outside of the ordinary?

We could also fill in the patio...and turn the house into a 3/3 with split bedrooms, a master suite on one side, kids rooms on the other...and open up the floor plan. 

I think I answered my own question when I found the information below, but feel free to add any important information that is missing...If you invest in real estate but do not qualify as a "real estate professional" , you are limited to a maximum annual $25,000 realty investment property loss deduction against their ordinary taxable income.

Brings to mind the dilemma of what to do when tenants padlock the gate to the patio area or backyard.

Ordinary and necessary is the requirement.