Then, when you file your taxes you can include depreciation on the property as an expense to further reduce any taxable income you might have. 

So the portion of gain related to that ADU would be taxable - or you can utilize a 1031 for that portion of the gain to have it be tax deferred as well.

I'd do a 1031 into a syndication which achieves the following1) Tax deferral via the 1031 - why pay taxes when you don't have to, let the unrealized taxable gain continue to work for you2) Passive - by investing in a syndicate you can move from being an active investor to a passive investor3) Returns - in my experience you should bet better returns by investing with a syndicateGood luck!

Converting an investment into your primary residence does not create a taxable event. 

Hi BP,I know that CA does blended assessment but what I'm trying to understand is how to estimate the 'taxable value' of the new addition. 

@David West - I'm not a lender, CPA or a lawyer, but it is my understanding that if you don't use all the taxable equity in a 1031, you will have to pay taxes on all the taxable gains not in the exchange.- Its also my understanding, when working with the right lender and appraiser they can include the income of the property for the refi appraisal. boosting what you may be able to pull out on a cash out refi-  I am familiar with STR property management companies that will guarantee to increase your net while earning their split. helping reduce your personal labor.-  Another option you haven't mention...

It isn't a taxable event for you until "if and when" he exercises the Option.

Usually you should be able to go multiple years with no taxable income. 

In general contributions into and distributions out of an LLC are not taxable events. 

If a partner contributes $1, there basis has changed, although it is not a taxable event.