So, how many of you move every 2 years for the tax free payday?

Question

I ask this because I am modifying my strategy slightly to include this after paying a crap load of taxes last year.  I fought the urge to do this since moving can be a drain on resources both time and money.  I may be a glutten for punishment but three weeks ago I moved my family (myself, wife, 4 year old, 2 year old, 12 week old) to one of my rentals so that we could put our home on the market, all while rehabbing another home to live in.
This also dovetails into another desire of mine to try and move into higher end homes to rehab although I'm finding it much harder to find deals using the 70% rule.  The deal I ended up doing was closer to 75% but the profit will be all tax free so that will more than make up for it.  
I would love to hear from others that move every 2 years and those that don't on the various pros and cons.
If your wondering why I would move out while trying to sell my home you probably don't have young children (or they are at least far less destructive than mine).

Account Closed · Answer

I've been doing it.

I buy a nice house, move in, fix it up while I am living in it, and sell after 3 years. 3 years is about what it takes to convert bad landscaping into eye catching sell-the-house landscaping.

When it is time to sell, I move out and have the interior painted and the carpets replaced with new. New paint and new carpet helps to sell.

I buy houses specifically because they are investments. So, not what I would build for myself, but what I can re-sell. Much better quality houses than I would ever use as a rental.

However, I gotta tell you, in this market I'm going to be in the current house several years longer.  I like the house and see no reason to dump it. For what it would sell for today, I would buy it myself quick. So, might as well keep it.

I worry that Obama might discover that potential tax money is going uncollected and get the law changed to eliminate that home-owner's primary residence exemption.

Yes, moving is a pain, but if it puts an additional $100k in my pocket, what the heck, I'll move for $100k.

Account Closed · Answer

Shane, you don't have to own the house for 5 years, but you can not live in the house one year, rent it out for 6 years, move into it for an additional year and get the exemption. The two years must fall within a 5 year period.

Account Closed · Answer

I also know a guy who does the same thing with spec houses. He builds, moves in, lives long enough to get the exemption and sells. He then takes the profits and builds another spec house.

His wife is on board and does all the interior decorating and landscape design.

Bryan Hancock · Answer

My understanding is that you can sell after 2 years tax free.  The 5 years thing is if you converted to a rental and have held for 5 years.

JScott dug up the actual code on this in another thread on the subject if you want to search the forum some for it.

Shane Moss · Answer

Clarification Question:
          
          If you have to live in a home 2 of the last five years to qualify for the tax exemption, doesn't that mean you have to own the house for at least 5 years before selling?  In other words, if I bought a house tomorrow, moved in and sold just two years later, would I receive the benefit?

Mike V. · Answer

Sorry, let me clarify my strategy.  Instead of buying my typical rehab and reselling in 3-6 months and paying short term capitol gains 28%, state income taxes 6%, and (according to some) payroll taxes 15% for a grand total of around 49%, I would instead buy a home to rehab that I would live in for two years as my primary residence.  This makes all profit (in this case 70-80K assuming no appreciation or depreciation) completely non taxable.
The real trick will be if I can get my wife to leave this nice house in 2 years.

Bryan Hancock · Answer

I donâ€™t know the IRS code numbers but there should be an exclusion for your primary residence if you lived there for 2 of the last 5 years.  There isnâ€™t depreciation recapture for this from my understanding.

It is true that the market direction will influence whether or not this makes sense.  Contrary to what the media and gurus tell you real estate does not always appreciate, especially when the media runs stories about the downfall of western civilization every week to sell ad time.

My wife would never let us move every two years and I am guessing others feel the same way.  If the tax delta is worth the cost of moving it may be worth looking at.  If you have some huge gains it may be worth looking at too.  You can always do an exchange for investment property and step up your basis at death.

Burt L. · Answer

I too would like to be able to take a thinner deal, if it were tax free. I'm a little confused though, as the new prop needs to be a two-year hold, which means market direction can greatly impact the return. I believe the required period of time to convert a rental to primary residence for the Section 121 exclusion has been increased over 2  years, and there is also depreciation recapture at 25% or so.

Maybe I'm not keeping up with the different shells in the home-moving shell game, but there are some newer rules that I'm not fully versed in and it may be a good idea to confirm them. I may not be keepin up with all your moving van's moves.

So, how many of you move every 2 years for the tax free payday?

Most Popular Reply