They would get that $500K tax free and the rest of the tax would be deferred in the 1031.A very elegant solution that puts $500K tax free in their hands now. 

No need to pay big bucks for this. 

You will want to fully understand the tax reporting burden you will face. 

Even after one year, that property may provide thousands of dollars worth of appreciation, you will pay down your loan and build some equity, and you can depreciate the asset. 

I have a followup question - I will realize a lot of capital gain from this home in Idaho, so I think unless I purchase a new primary residence I will have to pay that capital gains tax. 

Be sure to hold a hefty reserve to handle on-going maintenance, capex, taxes, and insurance.

I didn’t see your location in your profile or your post, but assume at least 17% state/federal taxes leaves you with $10k/yr. 

Here’s the situation:Purchase Price: $540,000Down Payment: 20%Mortgage Rate: 7.125% (30-year fixed)Monthly Expenses (Mortgage, HOA, Taxes, Insurance): $3,706Realistic Max Rent: $3,000As you can see, I’m currently short $706/month even with max rent.

We are now married and I expect we'll file our 2024 taxes jointly.

Often times you will pay much more in taxes than if you pulled the money out, paid the taxes and penalty and then started investing in real estate.For example, with the financing you mentioned, the IRA must pay taxes on the portion of the profit earned by financing.