Flip property turned principal residence? tax considerations

[Mike Komenda]

Thinking out loud a bit here but there is no better place to do it. My wife and I are at the in between stage of our careers where our salaries are going to more than double in the next 4 years.

My family has been in a house for 4 years and we would be happy right now selling for break-even of the price we paid (73k). We owe about 50 on it through family member issued private loan.

I just purchasd through auction what I intended to be a single-family house flip for 21k. ARV of 8-10k repairs is 83-85k, a profit of 50+k (160%) in the very short term.

. Its twice the size of my house, in a better location in the city, and needs about 8-10k in from what I see So far to be cosmetic and some plumbing work. I originally intended this to be a 3 month flip. However, factoring in taxes as ordinaryi income from profit, I am leery of shelling out that much in taxes. Single family homes don't really appeal to me from a buy and hold standpoint, as I already own a 2 unit doing that. if I found a good tenant, market rent of about $750-800/mo would allow me to pay off a 30k loan in 7-8yrs. This area is not an area of appreciation, so we can't figure on that.

I mentioned to my wife the idea of moving in to the house (after a 3 month renovation) due to it being in a better location and to my surprise, she was tentatively on board (with about an extra 5k of upgrades of course (new walk in shower, open lower level floor plan, some flooring, etc).

What makes the most financial sense and why?

1. Sell my home for break even and move into the newly renovated "flip" for a few years, allowing me to sell my home in a fringe neighborhood and move to a slightly better neighborhood mortgage-free. Then after 3 years sell the property and transfer the profits tax-free into our dream home we plan on building (or renovating).

2. Stay where I'm at and sell the "flip" quickly for approx. 160% of price+repairs and pay the tax bill (on 50k profit)

3. Try to rent the flip for a year, then sell to get long term capital gains tax rates.

Being that its the end of the tax year and I plan on shelling out a lot of repair/ upgrade money into the house in 2013, how would I handle it from tax perspective if I am unclear of my plans for the property (move-in/rental/flip)?