Quote from @Dan Gandee: One more thing: don't ever hand over cash until they've vacated the property.It's sad that this is even a consideration. 400 units under management and I've never paid a Tenant to vacate a home.

@David Ning feel free to reach out if you ever want to chat!

And was wondering if anybody has ever tried to get a project done there.

Rehab costs, holding costs, and the ARV will be the largest cash eaters or cash producers with this deal.If you underestimated the rehab (both costs and time) and overestimated the ARV, you could be underwater very quickly. 

You're right that it is new, and there is not precedent (to my limited knowledge) that this has ever been challenged and succeeded in an audit.

The other reason why you would choose option 2 is that no investor would ever buy #1 and the bank might have trouble financing a deal where the revenue can be iffy.  

If your purchase price (always the largest expense) plus the rehab estimate (the second largest) total no more than 70% of the ARV, the remaining 30% must cover your HML charges, agent commission, property and hazard insurance, property taxes, title insurance, escrow, staging, all else, and your profit.

Tell me about your first real estate deal how did you find it ?was it a house hack?what did you learn? Was it profitable?the first property I purchased was in Cleveland back in 2005 a single family that I purchased fo...

I had the same realization as Michael when considering section 1245 assets in a 1031 exchange, and I really have been looking for a concrete answer ever since. 

Ever hang up the phone and think of one more question?