Incorporating as a "New Every Two" Landlord

[Account Closed]

I am planning to invest in real estate using the new every two strategy with a twist. Instead of selling after two years, I plan to keep my previous properties as rentals. I have a full-time job, so saving up 20% down payments (which is required now for investment properties, right?) will take more years than I have patience for unless I'm buying $50k houses. I have two questions (well, three if you include the one in the last sentence):

1) Am I correct in assuming that I must remain an owner occupant for a minimum of two years? I know that's required if you're planning to sell, but I'm not sure if selling is the same as just moving out & moving someone else in.

2) How and when does incorporating come into the picture with this strategy? I am in Virginia if that has an effect on the answer.

Thanks!

[Steve L.]

I think you are mixing up strategies in your head a bit.

After you own a property for 1 year (primary residence or not) any profits are taxed at a long-term capital gain rate.

There is a special law, if you occupy a property as your primary residence for 2 of the last 5 years, any gains up to $250,000 ($500,000 if married) are tax free.

So if your plan was to buy a property every year, the primary residence exclusion wouldn't apply. Which is fine.

Now to address the incorporation question: you are wanting to get a primary residence loans (because they are a better rate and require less down payment). These loans can only be given to you in your personal name. You could technically transfer them to your LLC later, but this would probably violate your lenders due on sale clause.

I think the strategy is very good. To move every year and rent the previous house. Keep in mind after 4 loans you will have more issues getting future loans. If I were you, I would no bother incorporating until you own 4 properties. A lot can change in 4 years and you can ask your lawyer/tax guy if that would be beneficial at that time.