Simulating Destructible Terrain with Brushes?

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you could draw to the texture. Just calculate the UV location of a XZ coordinate, then draw some dark pixels.

The problem is drawing to a big texture may be slow. When you use the 256 texture flag, access may be faster, but Mipmapping is turned off for that texture, resulting in "uber-crispy" look. You may use a second layer texture for the terrain, using mask mode (flag 4).
eg:
tex2=createtexture(1024,1024,4 or 256)
entitytexture terrain,tex2,0,1

You may need to set the blendmode of the texture as well.