The occupant didn't show up (even though he was ready with information in hand to prove they had no ownership or leasing rights) and 21 days later the occupant was ejected.

In short , depreciation is a loan: you take it during the years of ownership and then return when you sell, known as recapture.Most investors do ignore it, simply because they have never heard of it.You're right: a 1031 exchange pushes depreciation recapture into the future, just like capital gain.Depreciation does not apply to flippers, and neither does depreciation recapture.

I am open to suggestions.Current or prior ownership of real estate: Currently rent an apartment.

The basic underlying concept is to separate the ownership/entrepreneurial spirit side from the techinical day-to-day work that you guys need to do.  

I think it would be better to have equal ownership in the dealOption 2: give investor first 30-40% of NOI and then split remaining 50/50 until he is paid back his initial investment then 50/50.

Here are the details:Your goals and story:  Want to do a reno/addition to the current primary residenceType of property: Single family homeLocation of property: Alameda County, CA Purpose of financing: Reno / ConstructionType of financing sought: Not sureCurrent or prior ownership of real estate: none Occupancy: owner-occupiedValue of property at present and/or your offer price: $1mAfter repair value: $ 1.2mAnticipated or actual appraisal issues: NoCurrent rents per month: $n/aFair market rents per month: $ n/aDown payment or equity: 100% equitySource of down payment funds, if applicable: n/aIncome Source: Salaried/hourly W2Gross monthly income (optional): $Monthly debt obligations appearing on credit report, plus (if applicable) personal rent and alimony/child support/etc: $ 1000FICO: ExcellentCredit issues: N/AAdditional details:

If I purchase the property, do I have to wait for each lease to renew or am I allowed to immediately start billing for water usage once the property is under my ownership?  

I realize I still will need to pay the depreciation recapture.https://turbotax.intuit.com/tax-tips/home-ownership/tax-aspects-of-home-ownership-selling-a-home/L6tbMe3DyHow can I qualify for a reduced exclusion?

You should look into a ground mount if you have the land, or one of the great community solar programs Mass has where you get the benefit of ownership as well as cost savings from buying into a large scale array.

This would allow you to manage the property as you would have ownership, and also gives you right of first refusal if the owner ever wants to sell it.