Make deductions for cleaning and repairs, refund the rest in the manner prescribed by the law.In the future, I recommend tightening up your rules.

It sounds like it is as I suggested where they won't create a rent control law but change the tax code to take away some deductions (maybe depreciation) if rents are increased over 5%.

just like you likely do with your 401k (through consistent payroll deductions) or an IRA through annual contributions, if not monthly.  

You are able to add back your non cash deductions which is deprecation.

Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy.

You'll want to do research on how much of the interest, if any, is deductible, because taxes also matter to me.  

To answer some of your questionsGross monthly cash flow is $3200 rent - $2550 expenses = $650 Yearly cash flow= $7800Vacancy 8-10% is close to 1 month's rent so = $3200 yearlyRepairs: 5x rule = $576 yearly CapEx: 1% of property value yearly= $4,000 (includes Special Assessments)Once I deduct vacancy, yearly repair budget and capex estimate I'm breaking even, but is that real?

Your tax deduction equals the interest that you actually paid each year.

However, generating large amounts of deductions/losses won't help you if your passive income is too low.

Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy.