Because it's already foreclosed I can't negotiate something with her to quit claim it to me and then work a short sale for her. 

If it was something like a medical mishap perhaps I could work with it...but I saw collections from jewlery companies, cable TV and other stuff like that.

That is what I got into and was still in it when I had that medical problem.  

This did not sound right to me, i believe you cannot deduct your "rent" from the income of the property, you are the owner ( unless it's under a corp and you pay rent to the corp - possibly) That is considered your personal residence and all deductions need to be pro rated. here is an article to read: http://finance.zacks.com/tax-deductions-owneroccup...I would consult with a CPA on this, and BTW in your example you would both want to claim $400 so each had full deduction, not $0 for him.

There simply isn't enough to go off of at this point in order to make the claim of interest only via amortized as Melissa mentioned above.

I am 60 years old and found BP about 20 months ago while was medically recovering.  

Also if you only have the main house as a rental and the guest house is your vacation spot you are only allowed to claim depreciation on the cost basis of the main house and the guest house is non-depreciable since it isn't rental property it's personal property.

They also stole a few thousand dollars worth of materials when they finally got fired, claiming that the materials were stolen from them.

Homeowner's I wouldn't bother filing a claim.

However, I found that they also have a foreclosure on their record and that apparently the man has an upcoming lawsuit being brought against him from a medical provider.