Fix up/Rehab an old Rental House and "Flip" to 1031 exchange?

[Will F.]

We have an old rental house that is not generating the Cap I'd like.  

I think that if I rehabbed the property new kitchen, landscaping etc, it could sell for a lot because the area is highly desired.  

Would it make sense to rehab the property for a couple months, list it, and 1031 exchange it for a multi-unit?  Would the capital gains taxes be 100% tax deferred?

How does this end up being paid if I eventually sell the multi-unit that I 1031 it into?

[Bill Exeter]

Your capital gain tax, depreciation recapture tax and Medicare Surcharge (Obamacare tax) would all be deferred as long as you acquired one or more replacement properties that were equal to, or greater than, the net sale price of your  relinquished property and you reinvested 100% of your net cash proceeds held by the Qualified Intermediary. 

You could defer the payment of these taxes indefinitely if you continue to exchange throughout your lifetime.  Your heirs will receive a step up in cost basis upon your death, and none of these taxes will ever be paid.