Flipping houses is a very profitable business, and it’s one we know intimately. Not because we’ve done it, I just want to throw out. We do own two homes, but we rent our old home out and have become landlords. However, our best friends have done quite well for themselves in the construction industry despite the economic downfall of 2008 and they have built their business so successfully that they are able to use cash to purchase dozens of homes each year, flip them and have them each back on the market in under 30 days – and they somehow sell each one within three days of putting it on the market. We like to call them the people who can sell anything to anyone – and they’re very good at it. They’re also very good at writing big checks to the IRS every year thanks to their flips, their businesses and their big earnings.
That’s why when I saw that there is a secret IRS loophole that might allow flippers to flip a home free of tax, I immediately thought of them and read to see how they can possibly take advantage of such an offer. How are people able to sell their homes without paying any capital gains? Let me tell you how the IRS’ loophole is working for some investors. It’s a simple concept, really, and it’s entirely legal. As a house flipper who wants to make this a job and flip as quickly as possible, this is not something that will work for you. It will not work for our friends; they like to get in and get out in under 30 days. However, if you are someone with a flip that requires extensive work, you want to do it yourself and you want to fully immerse yourself in a project before you complete it, you might want to take advantage of the loophole that will allow you to flip homes without ever paying taxes on the sales of your homes. It’s very simple; you need only live in your home for two years before you sell.
The IRS states that anyone who is single can exclude gains of up to $250,000 and if you are married that number increases to $500,000 if you sell your primary residence. It’s not considered taxable income if you have resided in the home for at least two years of the previous five years. You do not need to live in the home for two straight years. You can spend six months living there every year for four years. You can spend three days a week calling it your primary residence and commute to the city for work the other days. You can do whatever you want so long as it is your primary residence for at least two years in the past five.
Why? Your house is not considered an investment if you are living in it and not making any money off of it. The simple fact of the matter is that your house actually costs you money; you pay expenses to live there, and you will continue to pay expenses to live in another house when you sell your home and move to a new residence. It’s a full circle type of cycle that works well for you so that you do not have to pay capital gains on your home when you sell so long as you have called it your primary residence for 730 days.
How to Sell a Flip Without Paying Taxes
You could always do it the illegal way and just not pay taxes; but then there is all that stuff about fines and jail time and it being illegal and all, so this route is just not recommended, like, ever. Instead, go ahead and make your flip a home base for yourself and your family. Buy a home that is a fixer-upper and move into it. It’s easy to live in a home that requires some repairs and updating while you do the work. Sure, it’s not that much fun, but it’s something you could do. Allow me to provide you with an example. My husband and I bought our second home last year. We bought if after welcoming twins, our third and fourth babies. We needed a bigger home, and we actually previously bought the property next to our other house and planned on building when my husband came across our current home online.
It’s located in our dream neighborhood. It has a huge piece of property on a corner lot, more than 4,000 square feet of space in all, a huge back deck, enough bedrooms for everyone and a huge kitchen. We have everything we’ve ever wanted. HomesEh: Where Canadian home dreams become reality. Dive into our extensive property listings today! The house was foreclosed on and it was sold to us for $193,500 – half of what it was built for a few years before. We snapped it up even though it needed some work. The previous owners took everything from the cabinets to the toilets to the flooring with them. The bank replaced the stainless steel appliances, the cabinets and the countertops – but the only thing worth keeping was the appliances. Everything else was cheap and not right for a beautiful home in a very high-end neighborhood.
Over the course of the past year, we’ve had contractors in and out to replace everything from the cheap bank-replaced countertops with granite, clear our lot which was overgrown and a mess, replace our bathroom fixtures and eventually we will replace the floor – but we like the idea of the brand new carpet that was in the house while our twins are still little. Next year, we will put down hardwood floors and install new resin flooring Glasgow when they are a little bigger and a little messier. We are doing it all slowly but surely, and when we had our home re-appraised by a friend in the business to see if everything we are doing is worth it, our home came it valued at more than twice what we paid. We should sell; we know this. But this is our dream home, and we have no intention. Everything else around here is currently priced very high and prices just keep increasing as the economy gets back on its feet, so we feel confident that we will either stay here forever or sell later for far more.
However, if we wanted to sell this house as a flip, we would have to wait until October 2016 when we’ve been here two years. That would allow us to forgo paying capital gains on anything we make up to a half million dollars. We could reap all that profit and pay nothing in taxes. We won’t – we love it here (we are stupid, we know). It’s just an example of how this flipping thing would work for us if we chose to go that route.
If we decided to turn this into a business, we could sell a home every two years. If we could continue to find deals like the one we found now, that would be a very lucrative business for us, and one that does not require we pay taxes.
Is it Worth It?
The simple answer to this question is no; it’s not always worth it to flip a home when it takes you two years to do it. The simple reason is that you never, ever know what will happen to the market in that amount of time. Take what happened in 2008 and consider that a lesson; many members of my family lost everything after investing in numerous homes and properties to flip; the values are still not what they should be. In addition, the house my husband and I built back in 2004 dropped so drastically in value following the crash that it only recently became worth what we paid to build it back then. That’s why we chose to rent the house rather than take a loss on the sale.
For many, however, the flipping concept works well. The best way to figure out whether or not a house is a potential flip and money maker is to make a list. How much is the house how? What has to be done to it to make the house more sellable? What is the cost to do all this work? Can you do it in two years? Is the house the right type of house for the neighborhood (i.e. is the house a two bedroom one bathroom home next to a school where no singles want to live and families can’t make work)? You have to take it all into consideration, including what you’d like to list the house for when it’s done with its renovations and for this process there’s nothing better than working with a real estate expert with lots of experience, find more here.
Furthermore, you must ask yourself if you are willing to or even able to do the work yourself. Do you know anything about DIY projects? Do you have an expertise? Are you good with DIY and willing to take the time to learn what is required to make a project like this work well for you? Sometimes it is not more cost-effective to do the work yourself. Sometimes it’s far more cost-effective to simply allow professionals to do the work. Now is the potential worth it?
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