The seller and I are a very good match for eachother and have discussed a deal where I would acquire all 3 properties and seller financing would be available.  

Just to give perspective, they have worked very hard their whole life, is still working just as hard, and never really had anything to show for it, lived very modestly and never acquired any kind of wealth nor a real retirement account.

The property being acquired by a 1031 doesn't affect your leasing, renewal or finding a new tenant, in any way.  

Hello Maddie,If your goal is to use your savings in two years to acquire an investment property then using a tax-deferred vehicle such as 403B would not be a good idea.

Since you wanna work on building your passive income that means that you are looking to acquire rental properties where you will make a good return on your buck.

Also, putting $40k into this deal does take a substantial amount of our cash and we were hoping to acquire a second property within the next 12 months.This market does see a fair number of properties in the 8 - 12% cash on cash return so my gut is telling me to walk from the deal.  

I've got a pipe dream that maybe I can acquire it for about what is owed in taxes....am I delusional?

Because I was thinking I could just get a conventional mortgage for the next property, fix it up for 2 months using the lines of credit or savings that I acquire, then refinance it when it values higher after the rehab.  

Yeah, sounds like you have a strategy for at least making contact with some folks about acquiring their property and making it a win win for everyone.

I would also like to generate passive income over time but the truth is I will need a little bit more money to start expanding. so ideally I would love to do project management and start with some flipping to build some investment money to acquire the rental properties in the future.