Note this is interest income and taxable along the way and it assumes you can reinvest monthly and, realistically you would have to save up several payments to buy additional 10 or 20k notes.  

With the 100K in cash, YES, you could use depreciation to have no taxable income on a lot of cases.

@Leland DunnYou would pay the taxes on the entire amount of your taxable gain. 

If a tenant doesn't buy, the owner has a taxable gain that is not reported!

This also means that any deferred depreciation recapture, is recognized and realized (i.e. taxable) in the year of sale since there is no depreciable improvements on the property that you acquired.

I like the thought but first is that any money placed into escrow to be paid later is constructive if not actual receipt and would be taxable in that situation. 

During that time the property may appreciate significantly and you would have a taxable gain to 1031.  

He seemed to think it was worth around 130K based on his improvements, but I'm starting my analysis based on the County taxable market value of $88,850. 

As your investable base will be higher. 3) is there a flaw in your logic, when you say you will flip more properties in order to pay the tax bill -- those flip gains are also taxable.

The gift to you is not a taxable transaction.