Has anyone reverse house hacked for tax exempt capital gains ?

[Chris Welch]

Hello all,

I am currently 49 years old and have accumulated more than a dozen single family homes along with some other real estate and investments. I love real estate and it has really helped increase my net worth. I house hacked a few, meaning bought a house and lived in it, then turned it into rental when I/we purchased another home. As I often ponder the idea of retirement I was wondering if anyone has reverse house hacked a few houses to get the primary residence exemption on capital gains. Meaning, every two or more years strategically move into a home you have owned for some time which has a large amount of equity and maybe not been a great rental performer with the sole purpose of selling and protecting the capital gains from taxes. Obviously, this would take some time as each would have to be your primary for two years but seems like it could be a great way to feather your retirement nest or reinvest that money into a better performing asset tax free. Also, while in the house for the two years you could make improvements to maximize the sale price and return on investment.  Once you go to put that house on the market after your two years, move into and establish a "new" primary you have owned for years and start the two year process over again. 

Depending on the size and location of your sfh rentals, I understand this may not work if you have the need for a big house because of many kids or your rentals are in war zones. 

Also, I know you can 1031 and trade up to increase income and for other purposes. But I was specifically wondering if anyone has done this technique with sfh's they have owned for some time specifically for the tax exempt capital gains. Would love to hear how it went and any downsides which I am not seeing.    

[Dave Foster]

@Chris Welch, It's an absolutely stellar plan.  And one I've used for myself several times. We used it over a course of 10 years to gather enough tax free gain to buy a sailboat to live on for another 10 years (no way to 1031 into a boat darn it!!). The conversion back and forth from primary to rental or vice versa can be a huge tool.

The laws started getting stricter in 2008.  But here's the jist of it now.

Convert a property from rental to your primary.

Once you've lived in it long enough so it's been your primary residence for 2 out of the 5 years prior to sale you will get to take a prorated amount of the gain tax free.  The proration is between the time as a rental (non-qualified use) and as your primary (qualified use).  And you do have to recapture depreciation.  Example - buy a rental and use it as a rental for 2 years and move in.  Live in it for 2 more years and you would get 50% of the gain tax free (up to the limits) and have to recapture depreciation.  The longer you live in it the more of the gain is tax free.

The only other twist is if the property has been the subject of a 1013 (say you sold a not so nice rental for a very nice rental you wouldn't mind living in once day).  When that is the case there is one more requirement and that is that you have to have owned the property at least 5 years before you can sell and take the primary proration.

If you're mobile or have a willing significant other what could be a better retirement gig than going to all of your vacation rentals in order and living in them for a few years until you're tired of the view and it's time to redecorate. Sell take the proration tax free and move into the next.!!!