Buying/living in 2 flip houses

[Faith Roy]

HELP!!

We bought 2 investment homes and now are having trouble with the technical parts of it!

My husband is a contractor and we decided to buy 2 houses that were cheap and flip them. (The one house was $95k and the other was $120k, both from the same seller- who is a family member- in a subdivision) At the time, we couldn’t get a loan for the $215k so we have a note with the seller. The houses are now worth over $250k each. We are living in one and in the middle of construction on the other. We have lived in this house for a year now. How do we go about selling these to avoid Capital gains? What’s the best way to do this with lending/title co./ etc.. do we do quit claim on one and 1031 the other? Every time I think about it I STRESS!!! Help please!

[Scott Trench]

Interesting. Thanks for sharing, and welcome to BP, @Faith Roy!

I don't have a lot of specifics of your sitiuation, so I'm going to make some guesses. 

First, how long have you lived in the one property? After two years, you can sell it, if it's your primary, and exclude capital gains. That's a great exit strategy if you are comfortable in the place. If you aren't you can suck it up and travel for 6 months out of the year, and rent it out on a short-term rental basis. Just make sure you occupy it enough of the year so that you can call it your primary residence. 

Same deal with your other property. If you hold it longer than a year (might be two years - hopefully someone corrects me later in this thread), and rent it out, you will likely be able to get long-term gains, not short-term gains on the property. 

Your "exit options" for either property are: 

- Sell it (either short-term as a flip) 

- Rent it (either short-term rentals, or long-term rental)

- Live in it 

A 1031 exchange may be an option for one - perhaps @Daniel Hyman can chime in here on that.

[Faith Roy]

Quote from @Scott Trench:

Interesting. Thanks for sharing, and welcome to BP, @Faith Roy!

I don't have a lot of specifics of your sitiuation, so I'm going to make some guesses. 

First, how long have you lived in the one property? After two years, you can sell it, if it's your primary, and exclude capital gains. That's a great exit strategy if you are comfortable in the place. If you aren't you can suck it up and travel for 6 months out of the year, and rent it out on a short-term rental basis. Just make sure you occupy it enough of the year so that you can call it your primary residence. 

Same deal with your other property. If you hold it longer than a year (might be two years - hopefully someone corrects me later in this thread), and rent it out, you will likely be able to get long-term gains, not short-term gains on the property. 

Your "exit options" for either property are: 

- Sell it (either short-term as a flip) 

- Rent it (either short-term rentals, or long-term rental)

- Live in it 

A 1031 exchange may be an option for one - perhaps @Daniel Hyman can chime in here on that.

So because we have a promissory note with the seller, nothing has been recorded with title and neither of the houses are officially in our names. So that is why we don’t think that we can mark them as our primary residence we want to sell both houses as quickly as possible. Not sure if the title companies would let us backdate the occupancy and say that we have been living there for that amount of time if we show them the promissory note date?

[Scott Trench]

Quote from @Faith Roy:

Quote from @Scott Trench:

Interesting. Thanks for sharing, and welcome to BP, @Faith Roy!

I don't have a lot of specifics of your sitiuation, so I'm going to make some guesses. 

First, how long have you lived in the one property? After two years, you can sell it, if it's your primary, and exclude capital gains. That's a great exit strategy if you are comfortable in the place. If you aren't you can suck it up and travel for 6 months out of the year, and rent it out on a short-term rental basis. Just make sure you occupy it enough of the year so that you can call it your primary residence. 

Same deal with your other property. If you hold it longer than a year (might be two years - hopefully someone corrects me later in this thread), and rent it out, you will likely be able to get long-term gains, not short-term gains on the property. 

Your "exit options" for either property are: 

- Sell it (either short-term as a flip) 

- Rent it (either short-term rentals, or long-term rental)

- Live in it 

A 1031 exchange may be an option for one - perhaps @Daniel Hyman can chime in here on that.

So because we have a promissory note with the seller, nothing has been recorded with title and neither of the houses are officially in our names. So that is why we don’t think that we can mark them as our primary residence we want to sell both houses as quickly as possible. Not sure if the title companies would let us backdate the occupancy and say that we have been living there for that amount of time if we show them the promissory note date?

I'll be interested to hear what others say, but I wonder if you shouldn't worry about the tax situation here. I believe that this is a business that will generate short-term profits. I'd expect them to be taxed as ordinary income, and would encourage you to move professionally and quickly to complete the projects and realize those profits.

[Daniel Hyman]

@Faith Roy

You cannot 1031 a flip. I'm sure @Dave Foster has hundreds of posts explaining that. 

Perhaps there might be some other creative options, but this sure seems like an ordinary income situation. 

Thanks for mention @Scott Trench!

[Dave Foster]

@Faith Roy 1031 are a great option to avoid paying tax if you do decide to sell it. In order to do one you have to be able to demonstrate that you held your property for productive use in business or trade and generally everyone is comfortable if you  own it is one year.  But Fix and flips do not qualify for 1031's because your intention was never to hold them for investment but rather fix them then turn around and sell it. If you decide to rent it out for a while.  That would qualify it for the 1031 exemption. 

And I believe you mentioned you are one year into living in one of them.  If you can hang on until you've lived it for 2 years then you would get the first $500K of profit from that sale tax free!!!  That's a good incentive to hold on.

[Bonnie Griffin Kaake]

Quote from @Faith Roy:

HELP!!

We bought 2 investment homes and now are having trouble with the technical parts of it!

My husband is a contractor and we decided to buy 2 houses that were cheap and flip them. (The one house was $95k and the other was $120k, both from the same seller- who is a family member- in a subdivision) At the time, we couldn’t get a loan for the $215k so we have a note with the seller. The houses are now worth over $250k each. We are living in one and in the middle of construction on the other. We have lived in this house for a year now. How do we go about selling these to avoid Capital gains? What’s the best way to do this with lending/title co./ etc.. do we do quit claim on one and 1031 the other? Every time I think about it I STRESS!!! Help please!

If I am hearing you correctly, your goal is to avoid capital gains and purchase a more valuable property for investment purposes.  You will need an intermediary to handle a 1031 exchange. A 1031 is the best way to avoid capital gains until the newly purchased property is sold. Make sure the new property you purchase is much more than the combined two you are relinquishing. And, to reduce your tax liability going forward, get a cost segregation study done on the new property. Cost seg will save you a lot in taxes. 

[Juan V Lopez]

$300K equity – what a great problem, to have @Faith Roy!

Honestly, I don't think I've encountered a situation like this before but if I'm understanding you correctly, you want to avoid capital gains when you sell both houses correct? Here's a scenario:

1) House 1 – Continue to live in house 1 until the 2-year mark has passed, then sell if you are comfortable where the market is at.

2) House 2 – Finish remodeling it and hold it until the 2-year mark has passed. Then sell it afterward. You might still be taxed, but it won't be at the highest range. An accountant can clarify this.

Others have mentioned 1031s, which is also a great option if you just want to keep that money inside of real estate. I've done 2 1031's and it's a seamless process if you have a good intermediary. Hope this helps and wish you guys the best.

[Chad McMahan]

Quote from @Faith Roy:

HELP!!

We bought 2 investment homes and now are having trouble with the technical parts of it!

My husband is a contractor and we decided to buy 2 houses that were cheap and flip them. (The one house was $95k and the other was $120k, both from the same seller- who is a family member- in a subdivision) At the time, we couldn’t get a loan for the $215k so we have a note with the seller. The houses are now worth over $250k each. We are living in one and in the middle of construction on the other. We have lived in this house for a year now. How do we go about selling these to avoid Capital gains? What’s the best way to do this with lending/title co./ etc.. do we do quit claim on one and 1031 the other? Every time I think about it I STRESS!!! Help please!

What does your accountant say?

[Wayne Brooks]

@Faith Roy To use section 121 exemption, you have to both Own it And live in it for two years. What type  of “purchase arrangement” do you have. Typically, when you have a Promissory Note, it is because Title has passed to you and the seller finances it, having a promissory note and a mortgage document. In a land contract, title doesn’t pass to you, but there is no Promissory Note.