The Capital Gains Exemption House Flipping Plan
By Steve Gillman
If you know much about real estate at all, you probably know
that you can claim a capital gains exemption on the sale of your
home (also called the "primary residence exclusion").
There is a way to use this to boost your real estate investing
profits, provided you are willing to move every couple years.
And although this current slump (I'm writing this in December
of 2010) might not be the best time to try the following strategy,
real estate prices will rise again. Or perhaps this is
a good time, given the deals on foreclosed homes out there and
the fact that you have to hold a property for two years in any
case to cash in with this strategy.
In the past you could only take the capital gains exemption
on the profit from your home once in your lifetime, although
you could roll the gain into a home with a higher price than
the one you sold. That changed a while back, and now you are
allowed to pay no taxes on the first $250,000 of capital gain
($500,000 for a couple) on any house you lived in for two of
the last five years before the sale. Ask a tax expert for the
details if you are uncertain whether you qualify (you can get
a partial exemption if you are forced to move in under two years
for certain reasons, for example). But basically, you can buy
a home for $100,000, sell it for $250,000 in two years and owe
nothing in taxes.
Now, to do this as an investment strategy, you will want to
get the best deal on a foreclosed or otherwise distressed property
that needs some work, and fix it up prior to selling it two years
later. You have to live in the home during that time, so you
will be moving often if you pursue this capital gains exemption
strategy as a regular way to make money.
How Much Can You Make?
What you can make will, of course, depend on where you try
this, what happens to the real estate market, and how well you
buy, choose and execute the right repairs and improvements, and
sell. A few years ago I read an article about a young man who
was buying a home with problems every two years and selling it
for a $100,000 profit after fixing it up while living in it.
He didn't need a job. But this was while prices were going up,
so the gains were largely from appreciation in real estate in
general, not just from his smart shopping and work on the homes.
There are two ways to do this too. You can plan to use those
two years to do whatever work the home needs by yourself, or
you can hire others to fix it up. I would prefer the latter,
but if you have the time you are bound to make more doing the
work yourself. Whatever you make, it will be more than you can
make on a similar home that you don't live in, because of the
Ways to Make More | Related Opportunities
You can turn a rental property gain into a non-taxable profit
as well, if you are willing to make a rented property into your
primary residence for two years before selling it. How much of
a difference would that make? Well, since state taxes are often
based on your reported income on your federal tax return, you
can save paying both (check with a tax expert to verify this
is true where you live). If you're marginal rate between state
and federal taxes for capital gains is 20% and you have a home
rented out that has an adjusted cost basis of $60,000 (remember
that your cost basis is adjusted downward as you take depreciation),
and you sell it for $160,000, not paying taxes would net you
an extra $32,000.
If you own several nice homes that are rentals, all worth
substantially more than you paid, and you want to unload them
prior to retirement, you might live in each for two years and
sell them off one at a time in this way. It would take you at
least ten years to sell five homes in this way, but it could
mean an extra $150,000 at retirement.
Qualifications / Requirements
As mentioned, you have to live in the home at least two of
the five years prior to sale, and you can exclude up to $250,000
of the gain from taxes ($500,000 for a couple). For more complicated
cases, see a tax expert.
Sell your home if you are sitting on a profit, and look for
an opportunity to make money on another one after living there
- Some excerpts from a book about flipping houses.
- A blog about buying and selling houses.
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