Oh, and they pay taxes on the profits.
If you choose to penalize this behavior, not only will it not occur in average and down markets, you’d lose out on the capital gains tax revenue that’s currently collected.
How is that better than fixing it up without the buying and selling in-between?
These people fix up houses to look good, while using the cheapest labor and materials possible to maximize profit - taking advantage of the fact that most people don't know that the shitty 'fix-up' will fall apart 3 years later.
That's not good for anyone except the people engaging in this dirty business.
It's like arguing that the good old buy failing business, cut expenses, do some short-term shenanigans to appear/be profitable at the expense of longterm sustainability and re-sell is good. It isn't good, it's short term profiteering at the cost of long term disaster someone else has to clean up.
The previous owner that neglected it obviously isn't going to fix it. The prospective owner that may buy it it it's fixed likely can't manage a mortgage on a property they're fixing, the costs to fix it, and the cost of living somewhere else. But it's often easier to make major changes if the building isn't occupied during the process.
You certainly have a point with respect to some/many of the changes being superficial, but even with superficial changes, that can be hard to manage with an occupied home.
do they? or do they just keep doing 1031 exchanges, and doing cash-out refinances now and then to use the money?
The system is completely broken.