The IRS views it as taxable income because it’s not being used for the purpose of deferring taxes under the 1031 rules.For example, if you sell a property and only use part of the proceeds for the next investment, the leftover amount (after paying transaction costs, etc.) is taxed.

Issues 1) even garage conversion ADUs in single family zoned areas typically cost more to build than the value that they add.  

A friend of mine in Austin once negotiated a partial buy back option when the seller realized they might want back in if the market soared.. from what I read in Bloomberg, that approach can work well if both sides trust each other.If the tenants’ rent covers your carrying costs, that’s a nice cushion, but you still need to clarify that buy back clause.

In option 2, your costs are $25k higher.

Every Market (Detroit) is made up of a series of Micro-markets (neighborhoods) of which they are all different in cost, value, cash flow, rents, etc...

Do you mind expanding on how you attained closing cost and down payment?

The PPP and points on a DSCR loan can be costly. 

. - You have no recourse against an agent or PMC once you pay them for the placement and it turns out to be a terrible tenant:(If you have the time and network and post here for assistance, it's always a good idea to learn the rental business from the "ground up".Of course, one mistake can also cost you thousands of dollars.

Partner with a Real Estate Tax SpecialistThe tax code is complex, and mistakes can be costly.

Do you need to increase rents in the next year to cover your costs?