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Nick Category: Business Strategies
Current Grade: A-
Total Views: 566
Member Comments: 4
 Posted on: 03/24/2008
Posted by: Nick
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If you live in your house for at least two years you are exempt from capital gains tax. Individuals are exempt on the 1st $250,000 in gains, couples are exempt on their first $500,000 in gains. My question is are their any people out their who has used this tax exemption as an investment strategy. Maybe buying a house, fixing it up and living in it for two years, then selling the house, collecting your tax free gains, then buy another house and repeating the process.

It seems to me like it would be a hassle and a pain to do every two years and would only be worth it in markets that were appreciating exceptionally fast

Current Grade: A-
Category: Business Strategies
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Dever Law
Educator
Posted By: Dever Law on 03/25/2008

I use this strategy all the time.  While it is now more difficult to convince my wife and family to move, the nice check helps smooth fact that we have to move.


The Strategy should be tied to a plan of action, however.  Our plan was to move every two years until we had enough money to literally buy our dream home for cash. 


First we bought we were still in school and using student loans to pay the note.  Our student loan money was at 2.5%  Our loan was 6.5%.


We netted $37,000.00 on the first house, using none of our own money.  So walking our of college, we had a $37,000 nest egg. 

Long story short, our goal was a million dollar home.  That is only one move away.

 

 
JohnCorey
Ambassador
Posted By: JohnCorey on 03/25/2008
The strategy is used by people all the time. It does come with hassle. More so if there are school age children who are forced to change school. If they attend private schools or all moves are within the same school district there is less of a problem. It works for some while others choose other ways to invest. One big problem is the idea of living in a place that is being refurbished. John Corey
 
TReXGlobal

Posted By: TReXGlobal on 03/24/2008
Actually, this is a strategy that many people use. Until recently, it was relatively easy to do this with vacation property.

Previously, folks could live in a principal residence for two years, and sell using the exclusion, move into their vacation home for two years, and sell using the exclusion, with the result being a tax free gain of $500,000, THREE TIMES in six years.

Now, for properties acquired and used as a second home, and later converted to principal residence for a time and then sold, only the period when the property was used as a principal residence will count toward the capital-gain-exclusion computation. The amount of the gain that's proportional to the period when it was not a principal residence would be taxable.

Also keep in mind that depreciation taken has to be recaptured regardless of the gain.