@Edison Nunez , Your using the right language. Yes, if you sell after owning it for a year and your intent was to hold you will get capital gains treatment rather than ordinary income. But you will pay taxes unless you do a 1031.
As far as the 1031 goes, In order to qualify for a 1031 exchange the real estate you are selling must be real estate that you purchased with the intent of holding for productive investment use. There is no statutory holding period. But length of time held is one of the strongest indications of your intent. Most folks feel comfortable at more than a year. But there could always be specific circumstances where a shorter (or longer) hold period are appropriate.
In your case an unsolicited offer to buy at an advantageous price would certainly provide a great defense if ever questioned. For a long long time the unsolicited offer has been seen as a magic bullet. Other things you can use to demonstrate your intent would be your normal practice, rental agreements or rental listings, written correspondence with your professionals etc.
You've got a pretty healthy gain to shelter for sure. But keep in mind that if you want to defer all tax you cannot reimburse yourself for the improvements. You are required in a 1031 to purchase at least as much as you sell and use all of the proceeds in the next purchase - or pay tax on whatever cash you pull out. In your cash you could still take that $40K of rehab costs out to repay yourself. But you would have to pay tax on that. But you would also still shelter the other $155K of taxable gain. So either scenario provides significant benefit to you as long as you sell comfortable with your intent.
You have some great options! Before starting the 1031 exchange process what other properties have you looked at? It's important start looking now since because of the 180 days time limit. The capital gains tax is lower yes. It should be in the 20-30% range.
@Edison Nunez , you only pay tax on profit and depreciation recapture. - the 88K