After the initial inspection we sent a response to the inspection asking for $21,500 in seller credits to cover the roof and furnace (both needed replaced). 

First, the stairs leading down to it would likely need to be replaced.

So there might not be enough gain to need a 1031 exchange.If there is enough gain to justify the 1031 exchange then simply treat your replacement property as you would any other investment like @Daniel Osman said. 

@Phil SheltonYou would need a civil engineer to provide a drawing to get submitted to zoning and get a permit if it passes zoning is most common This also depends on the road - if it’s a state road forget it as it will take a year to get approved and cost a fortune - if it’s a local road process not as cumbersome but don’t expect this to happen quicklyIn some instances you may have to prepare sight distances etc to make sure it’s safe to add a curb cut

Also had to replace fuse panels to make it work - going back and forth with the city was dificult.

The property is a 3 bed/3 bath and it was engineered to have the ability to lockout the basement 1 bed/1bath studio as a stand-alone unit. 

The AC is old, but I’m planning on holding off on replacing it.

@Kyle Carter You cannot directly use a 1031 exchange to purchase a primary residence, as the IRS mandates that the replacement property must be used for investment or business purposes.

@Anade DavisHi Anade, You’re on the right track with reaching out to your survey and engineering company—they often have strong connections to local contractors.

@Dallas Smith To defer capital gains on your investment property, a 1031 exchange is an effective strategy, but the replacement property must be held for investment purposes for at least two years.