Forced Appreciation Lost Depreciation.... BRRRR

[Benjamin Paul]

I'm looking for solutions to a working but not ideal business model.

I bought in cash a cheap, run down house in a desirable neighborhood and am preparing to rent it as a single family home. I will have 150k into it and the FMV will be around 400. The people that rent around here are high quality and the rent should cover expenses without any problems. I'd like to take money out from the bank on a low interest, 30yr fixed rate mortgage and buy another cheap place to fix while seeing if landlording is a good fit for me.

Initially I intended to flip the house after living here for two years (I have lived here full time for two) but I love this house and do not want to part with it in exchange for other like kind property. However, the idea that i will only be able to depreciate a small percentage of the houses FMV (because I completed most of the work myself) gnaws at me.

Is there a way I can legally gain the FMV I have created at this property without losing it? My father has a 401k and is open to diversifying into real estate.

Does my low income tax rate mean that the depreciation I may not be able to apply to this place is water under the bridge?