In other words, don't mingle long-term hold properties with short term flips in the same entity because an IRS audit could deem you a dealer even on the long term holds if you were to sell any.

Unless you made an attempt to rent the unit, regardless of how or who classified it as a rental, you were not conducting business and the answer is NO.Filing a return with expense and no income is a BIG RED FLAG to the IRS and you will be audited and classified as  (believe it or not) conducting a hobby :sigh:

The first method is often preferred because it is simple, it is clean and easy to explain should you get audited, etc. 

Are you being called in for an audit?

Because you have not held the property for very long and because you have a history of flipping houses your 1031 will be suspect from the beginning if you're ever audited.  1031s are available for property that you purchased with the intent of holding for productive use.  

Do not get hung up - get started and add as you need them if you are the DIY kind of person.https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-5-review-and-examination-of-a-cost-segregation-studyCheck this out.

There are no secrets to saving me big bucks on taxes and still be in low audit risk. 

That violates the intent rule and if audited your entire exchange would fail.Exactly like @Natalie Kolodij said.  

Tell them also to note their name and unit number on the deposit ticket so the bank can pull them should you need to audit.  2) Set up an account with www.paynearme.com.  

I have also heard members discuss putting certain rehab dollars that are expensed on line 19 of schedule E with detailed supporting schedules so your mortgage broker or bank have an audit trail to possibly remove them from DTI calculations.