Is the cost of reinstatement, tax deductible, on the basis that it is the cost of acquiring the investment property? 

Meaning you dont have cash outflow but still get to deduct the expense against your income. 

So unless you have other capital loss  that can offset this capital gain (because cap loss are limited to 3k deductibility) or subject to NIIT tax, you should be in the same position, generally.   

If so you can later deduct it from the security deposit when the tenant leaves. yes it has, but given the fact we cannot collect more than 2 months as security deposit here in PA, i don't think it is sufficient to just cover more than 2 months of water bill, assume no other damage made to the house.

Its possible that the other lender didn't analyze your tax returns properly and didn't add back certain deductions such as depreciation to your qualifying income.Shoot me a message if you'd like.

I took the address to the Levy Court recorder of deeds and she provided me a document of the property info and where the current owner lives.

You definitely can take advantage of principal pay down, interest deduction, depreciation and on occasion but don’t count on it appreciation.  

Dunno if you get his senior freeze deduction, as that is means tested, and I don't know if it depends on his calendar year 2018, or calendar year 2019, income.

So interest on the original balance of the loan will still be deductible, but the deductibility of the interest will for the cash taken out will depend on the used of the funds.

Point is I am ok with deductions for major issues or damage, however how can I disput some of his claims, since I never saw the damages that he is claiming.