Flip Advice as far as Taxes

[Paul Brouwers]

This is a bit long winded, stick with me.

My wife and I have live in flipped 2 houses, doing most the work ourselves over the past 10 years.  Takes forever, lots of learning, have made great money.  2 years ago we bought one of the ugliest houses in the hottest area of our city with the intention to do the same, but probably have someone else do the work just for speed and because we plan to live here for a while vs just flip and move on.  Talking to a few builders, it's clear moving out for 3-6 months or so will probably make it easier on everyone.  This is where it gets interesting.

My neighbor just put their house up for sale and it ALSO needs work, but not as much.  This has been a rental for 10 years getting $1600/mo (they've owned it 40 years). The house is up for $365,000.  It needs a complete kitchen gut, new baths and maybe some other work, have a showing scheduled to see what's going on.  Comps in the area for similar sized homes that have been flipped on the cheap are in the $550,000 range.  It seems like after costs for downpayment, reno, realty/closing I could walk with around $85k before taxes, and that's where it gets interesting

My question is this, which I'll also pose to my CPA next week.  Is there a tax benefit to purchasing my neighbors and marking it as our primary residence and moving in?  Have our house renovated over 6 months.  Then move back in here, have the neighbors house renovated and then sell it a year from now? 

[Bradley Sriro]

Hey @Paul Brouwers from what you are explaining, the only benefit to doing what you are suggesting is avoiding a short-term capital gain on the neighbors property if you own it for over 1 year. If you own it for under a year, you are looking at paying ordinary income tax on the profits based on your tax bracket. 

In terms of your primary residence, if you have lived in it for 2 of the last 5 years, you can generally exclude $250k in profits from your gain if you are single or $500k in profits from your gain if you are married / filing jointly. 

Taken directly from the IRS website:

"If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.

Qualifying for the Exclusion

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule."

https://www.irs.gov/taxtopics/...