Yes, the acquisition costs is an expense for you and the interest income is ordinary income providing that you are not acquiring notes in a tax-sheltered environment such as a self-directed IRA.

Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale.

But we do have many investors who will have one entity set up for ordinary income activity (flipping) and one set up for buy and hold (1031 property).  

For example, I (as a dingle filer) have 30K of ordinary income and pay tax @ 12% on 18K of AGI income after standard deduction. 

Any one have experience with deducting rental expenses against ordinary income (not just rental income).

Income from fix and flips is ordinary income and subject to ordinary income tax and SET.

Good advice from Brit.

I have done this something like 3 times.While your waiting to sell them back the house, you are holding the house and possible converting a (short term gain, or ordinary income) into a long term gain.AS far as the foundation and inspector goes, most don't have any clue what they are doing. 

Material participation or active participation comes into play when its time to net your rental loss ( passive loss) with your other ordinary income ( w-2) Generall rental loss cannot offset other ordinary income, but there are two exceptions:1) You can net rental loss with Ordinary income if you are RE pro. 

An assignment will be something out of the ordinary.