Exit strategy on SFH

6 Replies

Looking for a RE meet-up in Central Ohio!

Looking to offer my help, to network and to gain knowledge

Not looking for a Guru sales pitch! 

I've signed up for a CORRE meet-up, does anyone have any reviews on this particular club?

Currently I am building a new construction home. I am on budget and it will cost $199,000 (including land). I personally have $10,000 in closing costs and property tied up. 

The home appraised for $275,000. 

I am house hacking it with Roomate's to cover mortgage payments. I only plan on living in this house for 1-year and selling before paying property taxes. 

My question is, how do I move to the next one. I want to keep building again and again (who wouldn't with those returns)

1) What's the best way to avoid capital gains? Can I transfer gains into next property to avoid taxes? 

2) Would a bank typically finance me for a new construction even right after I just closed on a new construction? 

3) Any other advice you have would be awesome. I really appreciate your time. Thanks. 


The best way to move on to the next one is to go out and do it! ☺ 

1. I'm not an Accountant/Attorney, but in my experience if you are flipping the property out of an IRA, or doing a 1031 exchange, you're going to pay tax on the gains.

2. There are plenty of options to finance properties, including many resources right here on BP. I could help point you in a better direction if I knew the following

• How many RE deals in last 24 months?

• What liquid assets do you have (Checking Account, Savings Account, IRA/401k, Life Insurance)

• Estimated Credit Score

Cash/Credit/Collateral/Experience will help open doors. If you want to talk about it message me.

@Trey Read In order to defer your capital gains tax and complete a 1031 exchange you would need to meet a number of requirements. First, the owner must have had the intent to use the property for a rental, investment, or use in a trade or business. Therefore, if you purchased the property just to flip it, then it won't qualify for 1031 exchange treatment. Typically, flippers will buy a property, update it, and place it for sale. So their entire intent is to sell the property for a profit.

Also, primary residences usually do not qualify. If a portion of the property is being used as a rental and the other portion as your primary, then you could only use the percentage of the rental portion to do an exchange.

Owning the property for a sufficient amount of time to show your intent to hold the property for rental income, appreciation, or use in a trade or business is also advised. The IRS does not state that a taxpayer must hold for a certain timeframe but with that being said if you hold the property for 24 months, you straddle three tax years and should easily be able to prove your intent, under audit. Hold time is probably up for debate. You may hear some people stating that 12 months is a sufficient time period, it's really a personal preference and should be decided regarding how risk tolerant you and your tax advisor are.

A primary residence usually falls under the 121 Exclusion which allows you to exclude from gross income up to 250k in capital gains (for one taxpayer) and 500k for a married couple. But, in order to qualify for the exclusion you must have lived in the property for 24 out of 60 months.

There are number of other requirements that you must meet in order to successfully complete a 1031 exchange. Have you considered moving out of the property and renting it for a couple of years and then selling?

@Trey Read , your best way to avoid tax on the gain from the property is to not avoid property tax.  If you are only selling after a year so you can avoid property tax that may be a little short sighted.  If you stay in that house for one more year it would be tax free by virtue of the sec 121 primary residence exclusion.  

If you're ball parking your gain at $75K ish then capital gains would probably be 20.3% or more than $15K.

I can't imagine that property tax on that property for the extra year would come close to the $15K you'd save staying there - not to mention the lift that the roomates are providing.

If you're anxious to get on to the next one then take out a refi and construction loan for a second property.  Begin it so that it is done when the 2 year mark is met on the first one.  Sell the first one, take the profit tax free and move into the next one beginning a new two year calendar on another tax free sale.

@Trey Read , you cannot avoid paying property taxes.  When you close, the taxes will be taken out regardless.  In Colorado, we pay property taxes in arrears, so if I sold any time before June of 2018, I'd be responsible for 2017 taxes and the portion of the 2018 year where I owned the house.  If you are living in the house, it isn't available for the 1031 exchange, but as stated above, living in it for 2 years means you don't pay any cap gains taxes for gains under $250K as a single filer.  If you are claiming part of it as a rental, that mucks up the works a bit on your taxes, but you'd have to talk to a CPA about how because I've never been in that situation.  Good luck!