Can i sell my home after 1 year?

Question

If i buy a primary residence 🏠 for 120k

But its worth 200k  It means its 80k in equity.

And my  mortgage is 1,200

And I do a lease option and se/he gives me 3,000 downpayment and she/he pays me 1,500 per month its ( 1 year lease), (after that year he/she will buy the buy the house ) so my cashflow will be 300per month and she/he will live in the garage for 1 year and i will live in the house for 1 year because its a primary residence then after 1 year she/he will buy my house and she/he will pay me 220,000 so its 100,000 profit that i can use to buy 2/3 properties.

Are my math wrong???

Is it a good plan???

Kevin Sobilo · Answer

Account Closed, I think we all suspect she will not be living in the garage and that you won't actually be using it as your primary residence for that year. It sounds like you want to financing with a low down payment to get into this deal.

Real estate investing isn't a get rich quick scheme. You should be able to stand a loss when you assume the risk of an investment. I think here all you see are dollar signs when there are obviously some risks.

Where did you get the property value from? Will that value still hold true a year from now?

With lease/options there are plenty of risks. Will the person be able to get financing a year from now? MANY people looking for this kind of lease/option will NOT be able to follow through. Will they be good tenants or will they do damage?

Also, will you get caught not living at the place by the lender and your insurance company. If the house burns down and they find you were not living there, you may not be covered!

So, are all of these sorts of risks worth a low down payment or would it make more sense to find more down payment money and get financing for an investment property?

Clayton Mobley · Answer

Account Closed if I understand your scenario correctly, you will only be eligible for a partial 1031, if any. Primary residences are not eligible for the 1031 - it is only for long-term investment properties. Typically, investors agree that you should hold the property for 12-18 months as a rental in order to appease the IRS and prove your intent to hold it. Since you are here stating that your intent is to buy as a primary and then sell it within one year, it is clear that you do not intend to hold it as a long-term investment and therefore would not be eligible for a 1031 exchange.

Now, even if you bought it as a primary residence and then decided to rent out your garage (or any other portion of the property that is not the entire home) then you now have a 'mixed-use' property. If you sold it, only a portion of the property would qualify as an investment, and the rest would qualify as your primary residence since you continue to live there.

The only way to qualify for a 1031 would be to purchase the property and hold it as a rental. As in, you don't live there, you rent the whole thing out. In your case you're still up against the issue of intent - as your post here illustrates that you intend to sell within one year.

Clayton Mobley · Answer

NOTE: I AM NOT A CPA. You should consult a qualified tax professional before pulling any triggers. If you are considering a 1031, you also need a Qualified Intermediary. Make sure to do your research and speak with professionals before you make any moves. If you sell your property before hiring a QI, you are automatically not eligible for a 1031 exchange.

It is difficult to advise without more specifics (do you already own this property? for how long?) but my guess is your best option is not the 1031, but rather the Sec 121 exclusion. If you have owned and lived in the property for at least 24 out of the past 60 months, then you can sell and take up to $250k of capital gain tax-free (or $500k if you're married filing jointly). Unless you are willing to convert it completely into a rental (ie move to another house yourself), then the portion of your value that could be used in a 1031 exchange (if you managed to qualify) would be barely worth the effort ( a garage is likely only a small portion of the entire property).

From the info provided I think your options look like this:

If you've already purchased the property and live there as your primary residence:

If you have owned the property for more than 60 months AND lived there as your primary residence for more than 60 months (these periods don't need to be the same 60 months) within the last 5 years, then you can sell it and take the Section 121 exclusion on your capital gain (up to the limits outlined above).

From your brief post I'm guessing this is your best bet.

If you've already purchased the property and live there, but can afford to move to another residence:

You can move out and rent the entire property long-term, thereby converting it into a rental and eventually becoming eligible for a 1031. Again, since the amount of gain (100k) would be below the Sec 121 thresholds (250k/500k), I don't see this as a necessary step unless you've taken a large amount of depreciation deductions while using it as a rental. If it has never been a rental previously, a 1031 is going to be more work than its worth based on the amount of gain you listed.

If you haven't purchased the property yet, but need it to be your primary:

Purchase the property and live in it for at least two years before selling. If you need to rent out a portion of it, you can do so, but only a pro-rated portion of your capital gain may be eligible for exclusion:

This applies to separate dwelling units on the same property. If the garage is converted into its own apartment (kitchen, bathroom) and has its own entrance, then it is a separate dwelling unit and you must prorate any capital gain on the sale.

For example, if buy at $120k, rent out 25% of the property and sell it at $300k, then your total capital gain is $180k but you are only eligible to exclude (not pay taxes on) $135k (75% of $180k) because you used 25% of the property as a rental.

* this also applies if you currently own the property and use it as your primary residence, but want to rent out a portion of it. As a general rule, if you use a property for both your residence AND a rental, then there's more math involved *

In this case, you have a mixed-use property and the portion used as a rental (25% in the example below) could qualify for a 1031 exchange, while the rest is covered by the Sec 121 exclusion. Again, I think this is more work than it's worth if you're only renting out a small portion of a prop worth $200k.

If the garage is just a room and the tenant must use your bathroom and kitchen and entrance, then it's part of your dwelling unit and you don't have to prorate your capital gain on the sale. However, you may or may not be required to pay depreciation recapture taxes, depending on whether you were eligible to claim a depreciation deduction for that space (you probably are) for the time it was used as a rental.

If you haven't purchased the property yet and have another primary residence:

Purchase it and hold it as a rental long-term (more than a year, at least). This is now an investment property (not your residence) and can qualify for a 1031 exchange. You may want to do some work to establish your intent to hold it long-term however, since your post here, again, is basically proof that you're looking at a short-term investment.

Here are some links that outline the ins and outs of the Sec 121 exclusion and the 1031 exchange:

https://www.law.cornell.edu/cfr/text/26/1.121-1 (look two-thirds of the way down the page, '(e)Property used in part as a principal residence')

https://www.irs.gov/publications/p523 (info you need is a little more than halfway down, 'business or rental use of home')

If you have other information about whether you currently own the property and for how long etc, then I'm sure you'll get some more relevant answers from the BP hive mind.

Tanner Marsey · Answer

@Jack Edward Johnson

There ya go.

Tanner Marsey · Answer

@Jack Edward Johnson

Not that simple. Lots of other costs need to be factored in. Taxes. Realtor fees. Possibly attorney fees. You’ll take a big hit on the taxes. Your 100k could turn into 40k real quick. Do your research beforehand.

Can i sell my home after 1 year?

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