It lets you take gain tax free not tax deferred. 

But that being said, the 1031 exchange would be the way to sell that and maximize your profit by deferring the tax and depreciation recapture. 

The building most likely needs about $150k-$200k in upgrades and deferred maintenance from years of neglect. 

I think I will have to put around $15k into the property at purchase to take care of deferred maintenance.

Would completely deferring the retirement plan for investing in stocks, options, and funds that are taxed at a capital gains rate along with real estate be wise?

Defer to the experts.

It would be tax free (or tax deferred until we sell the property) unless we did a 1031 exchange into another property when the tenant exercises the option.

If I sell the property, and roll the proceeds into a large mulitfamily that would cost more than the gross sales amount of the residence and absorb all the cash coming out the sale, can I defer the entire tax liability of the sale? 

This helps in deferring the impact from vacancies.  

I'll defer to @DeanHarris and his experience for more info as I'm relatively new in Memphis.