Capital gains and 1031 exchange?

I am currently renovating a home that is NOT my primary residence. I bought the house as an investment. I wanted to fix it up and sell it right away (flip) but taxes will hurt my profit greatly. Im trying to find new and crative ways to avoid taxes.

If I were to sell the house im renovating and use a 1031 exchange to buy another property and make that house I buy my primary residence and live in that house for 2 years and sell that house, will my capital gains be tax free? Or will they look back and see that I used a 1031 exchange in the past and tax me on those back capitail gains from the house before that.

This will work, you can avoid taxes this way, but there is one key point you are missing. When you do a 1031 excahnge, the property you are exchanging into also has to be an investment property. So, you really have to do the 1031 exchange into a new house, rent that house out for a year or so, and then you can kick out the tenant and move in yourself (and get teh 250K deduction after 2 more years living there). This is ok as long as you prove intent to exchange from one investment property to another (its a loophole, but one I've heard of used before). Still this is a bit of work (3 years in the new house - 1 as a rental and 2 as a primary residence) to avoid the taxes, but it should be ok.

I heard of a more extreme case where a guy wanted to move to florida. He sold about 6 rental places and the place he was living in and bought one big house in Fl. Rented it out for awhile (maybe a year,m not sure) and then moved into it. Bingo, no taxes at all (though I suspect when he sold the FL house he still would've paid taxes on part of the sale as I suspect he was well over the 250K deduction limit).

Your 1031 exchange has to be "like kind". If you are selling a rental/investment property, you must buy another investment property. You can not make it your primary residence, at least for a few years (may be some wiggle room there). You can go to the the irs website (www.irs.gov) and grab the detailed rules on doing 1031 exchanges (and there are quite a few). Also, to perform the exchange you should contract a "qualified intermediary" (usually a lawyer) that can answer these questions as well.

No, this will NOT work. 1031 exchanges are for like-kind INVESTMENTS only. As soon as you convert one of the investments into a primary residence (which is not an investment) the 1031 bus will shift into reverse and run over you for the favorable tax treatment you received in the past.