Owner Occupied Flips: An Interesting Real Estate Strategy to Grow Your Wealth Tax Free
Most buyers recognize that their home is their largest investment. However, most buyers don’t look at their home as an investment that can grow their wealth dramatically. However, a few very savvy buyers flip their primary residence every 2 years to capitalize on current tax laws to grow their wealth tax free.
Here’s what they do. They look for a home in a neighborhood they like that needs cosmetic upgrades and updates. They purchase that home at a discount because of its condition. It may not be their ideal dream home. For instance, it may lack granite countertops and stainless-steel appliances. It may have outdated bathrooms and awful paint colors. It may have an unfinished basement; you get the picture. The homeowner then rehabs the home over the next 2 years converting the ugly home in the neighborhood into the beauty of the neighborhood. This allows the homeowner to capitalize on natural market appreciation and appreciation based upon improvements when they sell their renovated home. Currently, an owner occupant seller can enjoy $250,000 in gains tax free if unmarried or $500,000 in gains tax free if married. This is Tax Free Income! This process can be repeated once every two years as the occupancy requirement for this tax benefit is you must live in the home two of the last five years.
So let’s look at a case study over a little more than ten years or 5 flips. For this study the buyer has focused on homes priced ideally for first time home buyers.
1st purchase may be a townhouse or single family home in a growing area for $300,000. The updated comps in the community are selling for $340,000. Over two years the buyer upgrades the home and spends $20,000 in materials to bring the home to top of market standards. Property values appreciate 4% yearly to $368,000 top of the market for the neighborhood. So the first flip nets $48,000 over and above the average area appreciated value for a renovated home. The second home purchased, perhaps in the same neighborhood, is for $325,000. Making an investment of $20,000 and sweat equity into the next property. The property in 2 years is worth $400,000 and the tax free gains are worth $55,000. Using the chart below as a guide here’s how it may look holding historic property appreciation at 4%.
For the savvy buyer that is willing to use his residence as a flip opportunity, the gains are astonishing. The 10 year tax-free gain in this model would be $312,000. For the traditional buyer that stays in their initial purchase, property appreciation at 4% per year would be $163,283 or property value of $503,283. The savvy purchaser that treats his primary residence as a flip investment will out-perform a long term hold strategy dramatically and tax free. The owner occupant flip investor will recognize an additional ~$150,000 tax-free over the ten year span of this model. Are you ready to roll up your sleeves and find the right home to invest in and complete an owner occupied flip? Call me! I’d love to help!