In his diagrams, he considered all rental properties as passive income, and had noted that profits (if any) from this passive income are not able to be utilized to fund a solo 401k or a self directed IRA.  

Because at one point you do have to pay it back.This being said, utilizing a tax strategy requires planning.

The most ideal way for you to utilize this funding and probably the safest way, would be to House Hack.

Between work related stuff, conventions, friends/family visits, pro/college sports, kids travel sports, concerts etc etc there are a billion reasons why people visit places like Sacramento and other cities that aren't your typical vacation destinations.

@Courtney Olson I did this for my candle business but it could work for real estateMaybe offer Step Up  Payments too, as long as the number works, and hint at it helping wiht inflation and maybe combined it with an interest rate that is above typical inflation.A combo of something like 4% inflation to keep your same spending power as the years go, and we increase the payment by $25/month every 12 months so your spending power stays the same and you get a bit of a raise every year, then we could do a balloon payment in 10 years to settle the rest.Something like that could be an option. 

You might utilize these extra cash for a down payment on a different house.Another good alternative is seller financing, which may be arranged directly with the seller and may entail a down payment and interest-bearing payments of the remaining amount over time.

If you were getting a mortgage, typically the borrower has to have some money to put in (downpayment).  

In fact, I regularly rent properties furnished, with utilities included.

In my case the property is old, bought in the 1980's and was a primary residence for many years,(until recently), there would be a significant amount of money spent on capital improvements over those years that could be added to the 250K exclusion + basis that could be deducted in a typical residential sale.Therefore is that extra capital improvement deduction lost in the 1031 transaction ?

I am open to suggestions on this as I realize this may not be the typical approach.