Is the only way to be exempt is through the 1031-exchange in this case or does it follow normal exemptions that couples can right off for capital gains? 

The usury laws are a hodgepodge of Constitutional Amendments, legislative passed bills, codes, and rules rife with numerous arcane exceptions and exemptions.   

This should be an income upper of $22.5K ($2.5K * 12 * 75%) >My thought is maybe I could 1031 into a property a couple years from now that does have the space for ADU's, and build once I can qualify for that loan.If you house hack a condo, I am not a 1031 expert, but I suspect renting rooms out in an owner occupied unit does not meet criteria and that the property likely qualifies for the 2 of 5 year tax exemption. 

Originally posted by @Ian Walsh:I didn't realize people still thought this was illegal.its state specific.. just like HML that come into Oregon thinking they are doing commercial loans on one to four units and therefore do not need NMLS or state license.. well WRONG.. you can see many a hard money lender with big fines and cease and desists. there are 12 states that require it and actually go after HML who think they are exempt..

I disqualified them because I could see that once their debt collectors started coming after them aggressively, their ship would sink.Here's something else to think about: Section 8 is non-garnisheable, and if you have to evict you won't be able to collect your money unless the person acquires some kind of non-exempt income. 

The SEC says the following:Under Rule 506(b), a “safe harbor” under Section 4(a)(2) of the Securities Act, a company can be assured it is within the Section 4(a)(2) exemption by satisfying certain requirements, including the following:The company cannot use general solicitation or advertising to market the securities.The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchasers.

We bought the first 2 properties cash and used delayed financing exemption to recycle our funds for the first 3 properties (see this bp post for details on how)You don't necessarily have to start with your own cash.

There is also misinterpretation of the due on sale verses "estate planning" exemption.  

I'd HIGHLY recommend that any individuals that own or manage rental properties in Seattle check out: www.seattle.gov/RRIO.Those required to register is anyone who owns or manages  a rental housing unit in Seattle; unless they qualify for an exemption (note: most probably won't qualify for an exemption).All properties with 10 or more units must be registered by September 30, 2014All properties with 5-9 units must be registered by March 31, 2015During 2015 and 2016, single-family, duplex, triplex, and fourplex properties with rental units will be registered.

No city or town is exempt from crime today and Tenant acknowledges this.