For your owner occupied home you can already deduct the majority of the same things a rental property can.

Can anyone recommend a property management software/app that allows the tenant to pay rent and it is immediately deducted from their account?

I've only dealt with deducting for damage when tenant is vacating after they've given notice? 

If you want to maximize the amount of tax deductible contributions, use a self-directed defined benefit plan.

I projected positive cash flow on a prospective property... until I added my expected income taxes, which turn the number red (primarily because principal payment is not deductible).Curious to see how folks think about this.

For taxes, you should be reporting this income already and taking necessary deductions.

Since the property is paid off, he is no longer able to deduct the mortgage insurance on the property. 

If you wanted to assess with greater accuracy, you should deduct the carrying cost of the $33k over the time period it takes to build the new unit (ie, the money isn’t generating income, but costing you ~4% interest).

But I am in great distress seeing how much taxes are deducted from my W2 income. 

The thing about security deposit deductions, is that the court usually leans toward the tenant unless the landlord has before/after photos showing the condition of the property at move in, and the damage caused on move-out.