I would certainly recommend going the route which pays less taxes. Still, if you are going to invest in California, it will probably be about equal – you pay the $200k in taxes or watch your investment eat up $200k (in cash flow costs and depreciation).
I would recommend investing the money in different areas of the country.
If you are interested, you can call the people at http://www.pacblueinvestments.com and tell them that you have so-so amount of money and you are thinking of doing a 1031 exchange. They might be able to help you out and give you some options. They can show you some real estate markets around the U.S. that are cash flowing right now and can point you in the right direction as to what your future plans are.
Not every place is in the same cycle as California.
Congrats though on having such an enviable problem…
