http://kycir.org/2018/07/05/eviction-in-louisville...High cap rates can be enticing, but clearly the high risk comes with the high reward. 

I'll sell him the house for $305K he can get financed, plus I will carry a contract for an additional 15K. 

If you can do that you will minimize the risk of being phased out.

After leading us on for nearly 8 months, she finally informed us that the bank rejected her financing because the house is wooden and has a greater risk of being damaged by the tropical weather.Recently we were presented a cash offer of 75k and the house was appraised at 112k in November 2017.

Hi Andrew,We own units in the same building in Center City, and we carry separate insurance and separate loans on each.

If you're risk averse, you can do a modest 33-50% down payment on your new property and still get in the ball park of $360-540k purchase price. 

It just creates extra paperwork.Your better option is to get good liability insurance and most importantly manage risk to avoid problems in the first place.

Will my taxable income go down to $105k, or does that extra deduction carry over until I have a positive year?

I think it's very dangerous to chase returns & to seek out the very highest ROI possible without considering risk. 

Also, I want it to be a great deal for him, not just something acceptably better than a T-Bill, especially given that there will be markedly more risk than from a T-Bill.