Also you might want to try www.1031X.com We have used them half a dozen times. Easy to work with and they only charge $400! (I have no affiliation with them)

I would find a good accoutant to figure out the best way to handle profits. If you hold a property for less than a year you will be paying income taxes at your regular tax rate. The money you make from the flip could put you into a higher tax bracket. Even if you hold a property for a little over a year there is a chance that the IRS could determine that your "intent" was not to hold the property for investment. If that is the case you could still be taxed at your regular rate- along with what ever fines and fess they decide to add on... except that my one experience with a tax auditer looking at 1031 exchange info- they had no idea what the 1031 tax code was. A good accoutant who works a lot with real estate investors will be well worth your money.

A 1031 exchange rolls the gain from the sale of your old property into your new one. Both properties have to have been held for investment, or used in a trade or business, and you only have 180 days from the sale of your old property to get your new property purchased.

The problem is that Section 1031 says that it does not apply to "property held primarily for sale." So how does the IRS know if your intent was to hold it for investment, which would qualify for a 1031 Exchange, or hold it for sale, which would not? The IRS will look at a number of factors:
Why you originally bought the property
What you subsequently did with it
The extent of the improvements you made to it
The number and frequency of other transactions you've done;
The business you are in
The effort you went to find a buyer for your property
The listing of the property for sale with real estate brokers
What you were doing with the property at the time you sold it.
In other words, if you make your living by buying fixers, or building spec houses, and you always sell your properties within a few months of the completion of the construction or renovation, and especially if the income would be "ordinary income" to you (as opposed to short term capital gains), you have almost no hope of your 1031 Exchange passing IRS scrutiny in the event of an audit. On the other hand, if you always hold your properties for a considerable length of time, and this one time the buyer came to you and made an unsolicited offer you could not refuse, you could justify a 1031 exchange transaction.

If you purchase, rehab and then hold the property for a rental for at least the minimum time period there will be no problems.

AZLender the property you are buying as the other 1/2 of you 1031 does not have to have been an investment property previously as long as you intend to use it as an investment property. An example is a rental house I had owned for over 7yrs which I 1031 Exchanged for a older 4 bedroom home very near a major university. I rehabbed the property and currently use it as a rental for college students. It tend to hold investment properties for at least 7 yrs and do the exchange in year 8 to maximize depreciation. The earliest I would consider a 1031 is 5 years unless the deal was very sweet.

Let me clarify, I wasn't stating it had to have previously been an investment property. I was stating that any 1031 funds used for the purchase of a new property have to be used for an investment property.

As 1031 Exchanges ONLY apply to Investment properties that is pretty much a gimme for this topic.

Right, I understand the 1031 process fully, but in your following statement:

"AZLender the property you are buying as the other 1/2 of you 1031 does not have to have been an investment property previously as long as you intend to use it as an investment property"

Led me to believe you did not fully understand the content in my post.

You're both right. The tax code does state that both properties have to be held for investment (meaning the relinquished property and the replacement property- not that the replacement property had to have been held for investment prior to the sell). Yes, it's a "gimme", but it's still part of the code...