In the case of the sale, CA LLC would be the seller, then, when you purchase the property with TX LLC as a wholly owned subsidiary, TX LLC would be reported to the IRS via the CA LLC tax return, preserving CA LLC as the taxpayer.

The IRS says you have to recognize income when you earn it, even if it is used it to pay down debt. 

@Lauro TorresYou absolutely do NOT report your profit, unless you enjoy dealing with the IRS letters.You need to report the full sales price, per closing statement, and then correctly subtract everything you put into the property: purchase, rehab, holding, funding, closing etc.

Will the IRS see this as purchase money and will the mortgage interest be tax deductible?

@David LutzYes it still may be possible to take another loan if you have had one in the past 12 months under the same plan - you would need to work through the multiple loan rules and possibly consider the relatively recent IRS guidance on the topic. 

no, IRS liens and their redemption of 120 days completely separate from foreclosure Redemption

Plus it will protect you in the event of an IRS audit.

Here's a helpful article for you from IRS site: https://www.irs.gov/businesses/small-businesses-se...There're actually experts that specialize in 1031 exchanges.

Get ready to hop-scotch.

There is an IRS safe harbor at 2 years.