In one short sentence, I would buy a house that needs updating using a low down payment loan in a desirable area, then use a renovation loan (or my own money) to do the update work. Live in the newly renovated house that is exactly how I like it for at least 2 years, then sell it and repeat. There’s a lot to unpack here so I’ll start with why 2 years. Note, I’m not a tax professional so I’m using myself as an example to explain this.
When I sell a home and it generates a net gain, there is a capital gains tax due unless the home is my primary residence, in which case, I can qualify for up to $250k exclusion (AKA capital gain tax free) for a single filer. The exclusion is up to $500k if I’m married and filing jointly with my husband. But I / we need to live in the house for at least 2 years.
The advantage of looking for homes that need updating is that most buyers in the market place are looking for the perfect home and move-in ready homes. I don’t have to compete with them on the perfect homes and I can still move in and start making it mine. I will likely be able to negotiate for a better discount because of less competition. The disadvantage is I’d have to live in a construction zone for a few months depending on the amount of work needed. If I’m using a renovation loan, the entire process needs to be approved by the lender, which can be a little inconvenient, but they’re like partners to me who are looking out for me to hire good contractors until the work is complete.
In Fresno county where I live, the annualized appreciation is about 7% so assuming the market is stable, if I purchased a home 2 years ago for $300k including cost of renovation, now it would be work over $343k. What’s a better way to make money and not pay capital gains tax than living in it? The best part is, if there is a market downturn, I don’t have to move. I can stay living in it until I want to find the next place to do it all over again.
Link to the IRS code section mentioned above. Topic No. 701, Sale of Your Home | Internal Revenue Service (irs.gov)
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