What you're referring to is much closer to a "buy and hold" strategy, combined with a rehab. (Buy and hold often implies buying and renting out, which is what a growing number of investors are doing now.)
Okay, so those are the definitions. Does your plan make sense? It could. It's worked for others. But keep in mind that many of these rehab jobs take far longer than you expect. And while it's going on, areas of your house are going to be marginally inhabitable, at best. Some people tolerate that better than others.
You would want to find a property substantially underpriced. Or discounted because of its condition. Then get it thoroughly inspected. Not just by a home inspector but, as appropriate, by an electrician, plumber, and possibly a structural engineer. You don't want your $25,000 rehab turning into a $60,000 rehab due to structural flaws or other very serious problems.
The next question is what the market will look like when you're ready to sell. Not just real estate in general, but in the area you buy. John paints a gloomy picture, but he's probably not that far off. With the financial news out just today--the impending bankruptcy of another major lender, job losses, a declining stock market--coupled with oil over $100 a barrel, the prospect of trillions (yup, trillions with a "T") of possible mortgage defaults over the next few years, wars in Afghanistan and Iraq (the latter costing over $10 billion a month for the foreseeable future...hey, maybe 100 years according to one presidential candidate), a health care crisis--the prospects for the next few years look, um, uncertain. To be on the safe side, I'd certainly be looking at a time horizon of more than one or two years. And I don't know what the major economy/employer is, but I'd be cautious if any sizeable chunk depends on people's discretionary income.
As far as taxes, that's something for an accountant to answer. Not only because of his/her expertise, but also because part of the answer depends on your particular financial situation. In general, though, probably the greater effect on your taxes will be federal laws, such as capital gains taxes (preferable to the taxes that a true "flipper" pays). You'll need to keep detailed records of your expenses. Lots of other things I'm reluctant to mention here, but you'll want to go into this with the proper planning.
Like I said, I've known people who've done what you're hoping to do. (Someone in my office began a similar project about 3 years ago. He's still working on it. I really doubt you'd be able to complete the rehab in a year, even if you totally commited to it.) But your time frame may be too short, and the economic issues over the next 5-7 years means you'll have to be super-careful if you even want to consider going ahead.
Not what you wanted to hear, I imagine. Still, I hope that helps.
Do your research about the neighborhood and area you're buying in, job projections, new companies coming into the area, transportation developments, what sets the area apart from others, will the area be desirable in five or ten years, what are the rental rates, and so on. Hope this helps.
Unfortunately flipping has been made to seem easy and lucrative. It is neither. Individuals who profit the most from flipping are able to do their own work.
The minute you start subbing it out potential profits can be lost. There is so much calculation on market condition, interest rates, competitive properties for sale to name a few that factor into flipping.
Long answer: Why tie up your capital with something that has a very high probability of blowing up in your face? It will remain a "buyers market" for the next 5-8 years, if not longer. Rent for the next 2 years and keep your powder dry.
What you're starting to see now is the beginning of the end to the largest speculative bubble in the history of the United States. It's not going to be better in 2 years. Odds are good that it will be worse. A lot worse.
In a market that is not showing rapid appreciation, the ability to successfully flip a property depends upon great decision making, savvy purchases, carefully budgeted improvements, and managing expenses from day one.
You need to live in your home for at least 2 years as your primary residence or you will be responsible for capital gains tax. Consult a tax advisor for advice for your situation.
Are you able to buy well, manage expense, and have the market at least hold steady. If the market holds steady, and you buy low, and make improvments that add value, yes, you can flip. Few can do this well and for huge profits. Are you looking at this as your home first, with a potential for financial return?