Tax question: selling primary residence & capital gains

[NetWareHead]

Taxpayer relief act of 1997 provides a tax break for homeowners selling their primary residence. You have to live there for 2 years take advantage of it. Then when you sell it, you pocket any gain tax free (up to 250K for single filer, 500K for married couple) and avoid the typical capital gains tax that comes when profiting off of selling an asset such as this.

My fiance and I have renovation experience from a few different houses, tools and a team of contractors at our fingertips from various projects we've done. We were thinking this could be a great way to supplement our incomes, generate capital for more investments or even have one of us quit a job. We were thinking we could make this tax break into a core strategy of our own business, renovation is something we are reasonably comfortable doing anyway.

Scenario: buy a dumpy fixer upper with ample room to shuffle around in. Say a 4 bedroom and 2 bathroom for illustrative purposes. You have 2 years to get the house to a selling condition so you do one or two rooms at a time. Maybe do one bathroom while you use the other one and then switch. The kitchen will be the hardest part since not many people have a second kitchen to use. My fiance is a realtor so she is reasonably in tune with what current buyers want. Every improvement from this point forward would be geard towards attracting a future buyer. For instance, we dont really like stainless appliances but will put them in becuase the majority of buyers want that.

After 2 years, if you play your cards right, buy in the right neighborhood, dont over-improve the property etc... You get to keep all of that profit from the house sale. Say you make a big improvement that nets you a healthy profiit to the tune of 125K. Thats a tax free profit which you can repeat every 2 years, probably 3 years to be realistic.

Yes we will have to move every few years. Sure part of the house would be a construction zone but for a healthy tax free profit you get to keep for yourself, I could make this sacrafice. Anybody done this? Any glaring holes in this stragegy that I've missed? Can this tax break really be repeated every few years?

 

[monkeydelmagico]

Couple thoughts:

They call it "sweat" equity for a reason.

Living in a construction zone is not everyone's cup of tea.

That team of trusty contractors will quickly catch on and start charging.

Getting a good bargain on a house where profit margin is possible takes a lot of due diligence.

That being said, I am currently doing exactly what you describe. So far I am 2 for 2 on much smaller capital gains than you have described. The tool chest is getting impressive and the knowledge is priceless.

The stress/friction sometimes between GF and myself is a bit troublesome. It could either make or break the relationship. Mine is a trooper though and will don the protective gear and wade into piles of cat shit. So Sexy.

 

[boomerang]

Taxpayer relief act of 1997 provides a tax break for homeowners selling their primary residence. You have to live there for 2 years take advantage of it. Then when you sell it, you pocket any gain tax free (up to 250K for single filer, 500K for married couple) and avoid the typical capital gains tax that comes when profiting off of selling an asset such as this.

As this is the primary reason for your post, my advice would be to research it further. I would talk to a CPA or at the least someone with a lot of experience that does taxes. I would go into this with my eyes wide open and with as full an understanding as I could have regarding the process. The laws are changing all the time too, so that makes it even more important to make sure you're getting the most up to date information you can get.

We have a second home. I was considering making FL our primary residence instead of Michigan in the interim until we sell and move to FL full time. In talking to a friend, he brought up the capital gains angle. I researched it as best I could and found some conflicting information. I decided against making the "move" for a variety of reasons but if I'd decided to pursue it further, I would have consulted with someone who knew for sure what I would run up against.

My advice, for whatever it's worth.

 

[NetWareHead]

Getting a good bargain on a house where profit margin is possible takes a lot of due diligence.

True. The thing is that we are willing to buy an absolute dump as long as it has good bones, is structurally sound and we can envision both a finished tasteful product and profit. I guess I should mention that we both have houses of our own that we purchased prior to meeting each other and in the event of an epic renovation that renders the house unfit for living (winterization, during heating system replacement etc... etc...) we will at least temporarily have some where else to live.

My biggest weakness is I tend to overimprove and I start making the house into something I will like and live in. For instance in a house I am going to keep as a cash cow, I installed an indirect water heater (HTP Superstor) with a lifetime warranty. I wouldnt do that or spend like that in a house Im letting go in 2 years; they will get a home depot direct water heater

The stress/friction sometimes between GF and myself is a bit troublesome. It could either make or break the relationship. Mine is a trooper though and will don the protective gear and wade into piles of cat shit. So Sexy. .

This is our first project we are doing together and we are having fun. She gets her hands as dirty as mine and Im starting to think we make a pretty good team doing this. Plus she is good at painting, can cut a ceiling edge better than me and can pick out colors (I'm prety retarded when it comes to decoration). Plus she can stage the place when ready to go on the market. She is a realtor and has access to data enormously valuable to a business venture like this.

 

[dbcooper1]

I've not done this yet as I've always upgraded but I think this used to be a one time deal. Did that change with the taxpayer relief act of 1997?

 

[NetWareHead]

I've not done this yet as I've always upgraded but I think this used to be a one time deal. Did that change with the taxpayer relief act of 1997?

Based on what I was reading, if you were 55 or older, before this law you had the opportunity to take a once in a lifetime tax exemption of up to $125K. If younger, the only way to get around this tax was to roll in the money from a house sale into a new house purchase.

 

[CPA]

Yes, you can do what you outline and get the tax relief benefit as long as you fulfill the residency requirement.

In fact, you can work on a new fixer-upper while living in your current home. If you time it right you could have your next property ready to move into after your two-year residency requirement is completed in the current home. Put the current home on the market and move into your newest home. That way you're selling every two years.

All that said, good luck, if it was that easy and you could make that much money each time, everyone would be doing it. I had a good friend try to do what you are looking to do and he gave up. Market was too finicky. He ended up going into commercial building construction. Much more steady.

 

[NetWareHead]

Yes, you can do what you outline and get the tax relief benefit as long as you fulfill the residency requirement.

In fact, you can work on a new fixer-upper while living in your current home. If you time it right you could have your next property ready to move into after your two-year residency requirement is completed in the current home. Put the current home on the market and move into your newest home. That way you're selling every two years.

All that said, good luck, if it was that easy and you could make that much money each time, everyone would be doing it. I had a good friend try to do what you are looking to do and he gave up. Market was too finicky. He ended up going into commercial building construction. Much more steady.

Thanks for the input!

 

[edro]

Yeah, it's a great plan.
My wife and I have done it a few times.

Be warned though... it can be exhausting, and you might not profit as much as you think.
Estimates on projects always tend to be low and estimates on selling always seem to be high.

Throw kids in the mix and good luck finding time for projects.

 

[richardycc]

it looks easy on paper, and your other half need to be fully committed, if she can do a few of these with you without complaints the whole time, she is a keeper.