Tax-Free

 Tax-free advantages of becoming serial home buyer

Robert Bruss, Inman News
Published October 20, 2006

Do you have any friends who sell their homes and move about every two years? You may wonder why they change homes so often. No, they are not in the federal witness protection program. They are "serial home sellers" and have a profitable reason for selling.

Tax laws encourage the profitable tax-free home sales. Internal Revenue Code 121 permits tax-free principal residence sales profits up to $250,000 (up to $500,000 for a married couple filing a joint tax return).

To qualify, the seller(s) must own and occupy their principal residence at least 24 of the last 60 months before its sale. But IRC 121 can only be used every 24 months. If you want to maximize your tax-free sale profits, there are five easy steps:

- Buy a sound, well-located house or condominium below market value needing cosmetic fix-up work.

- Move in and make it your principal residence.

- Make profitable improvements to the residence that cost less than the market value they add.

- Profitably sell the house at a tax-free profit not exceeding $250,000 (up to $500,000 if husband and wife occupied the home 24 or more of the 60 months before sale and they file a joint tax return).

- Repeat every 24 months to become known as a tax-free serial home seller.

Recognizing the "right things wrong" is the first step to finding a profitable fixer-upper. If creating tax-free profits, while enjoying your home appeal to you, especially if you are a handyperson or in the construction field, serial home selling can be the perfect business opportunity. The only skill required is to recognize a house or condo with "the right things wrong."

Most older houses qualify, as virtually every house more than 10 years old needs fresh paint. Paint is the most profitable improvement homeowners can make. Spending $1,000 on painting often adds $5,000 to $10,000 in market value.

Other examples of homes with the "right things wrong" include the need for new light fixtures, fresh landscaping, new carpets and flooring, and overall cleaning and repairs. An especially profitable home improvement is adding a second bathroom to a one-bathroom house.

However, the "wrong things wrong" with a house are necessary but unprofitable work that doesn't add more market value than it costs. Examples include a new roof, foundation repairs, new wiring, replacement of galvanized pipes with copper pipes, siding replacement and window replacement.

Many home improvements are "nice to have" but they don't add more market value than their cost. Examples include bedroom and family-room additions, kitchen remodeling and bathroom upgrades. Such work may make your home more desirable while you live there but is unlikely to add more than the cost to the market value.

Because major home improvements can be traumatic, the smartest serial home sellers renovate their homes before moving in. Then they get to enjoy their fixed-up home for at least two years without the hassle and inconvenience of work in progress.

Avoid costly mistakes when buying.

- Don't buy a house in excellent condition (it lacks fix-up profit potential). Instead, buy the worst house in a good neighborhood.

- Avoid most condominiums and townhouses. The reason is no matter how nice you fix up your unit, its maximum resale market value will be held down by the recent sales prices of other units in the same complex. For example, if you fix up a condo penthouse but the other units in the building and the common areas are "ho-hum average," you won't earn much.

- Stay away from "extreme makeover" houses, which need to be torn down or renovated by moving walls and rebuilding the interior. Profiting from them is extremely difficult.

- No matter how much potential a fixer-upper house has, stay away if it is in a bad location, a high-crime area or if the public-school quality is poor. These factors will hold down resale value no matter how well the house is upgraded.

Work with a buyer's agent to find fixer-uppers. Buyers of fixer-upper houses have a major advantage. Most other buyers don't want these fix-up houses. They prefer to buy a house, turn the key in the door, and move in. That's the way to profitably sell your house.

A sharp buyer's agent will alert you when a fixer-upper house with "the right things wrong" comes on the market. Additional sources of profitable home purchases, which most buyer's agents don't follow, include foreclosures, probate and bankruptcy sales.

Consult your lender for ways to finance the improvements. To pay for the improvements, because the house will become your principal residence for at least 24 months, many lenders offer combination mortgages to pay for the purchase and the improvements.

The lender's appraiser will evaluate the home's current "as is" market value and the upgraded market value after the improvements are completed. The lender pays out the improvement portion of the loan as the work is completed.

Another finance method is to buy the house with mortgage financing and then obtain a home equity credit line secured by a second mortgage to pay for the improvements.