Is a live-in 2-year flip really a thing?

Rehabbing & House Flipping
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Is a live-in 2-year flip really a thing?

Lam N.
Rental Property Investor · Troy · Member since 2017 · 175 posts · 271 votes

To understand where I'm coming from, read this other thread I started.

https://www.biggerpockets.com/forums/67/topics/445...

I did a google search for live-in 2-year flip, and the only things that show up are articles talking about buying a place, pay contractors to fix it up, put it on the market ASAP, and pray you at least break even.  There's really almost no one talking about live-in 2 year flip, which now that I've been thinking a lot more about makes more sense to me for those of us who don't have millions of dollars to invest in real estates.

Our strategy is this.  We would both have our full time jobs.  During the 2 years that we live in a house, we would slowly but surely fix it up with our own labor.  So, the only things that will cost us are material costs.  When 2 years are up, we put the updated house on the market.  Why 2 years?  To avoid capital gains tax.  I'm already paying 30% in taxes from my day job.  Any capital gains I get before the 2 years limit would surely also be 30%.

To me, this makes perfect sense.  We're not really risking anything.  There's no carrying cost involved.  Why?  Because we live there!  There's no risk of a flop.  Why?  Because if we can't get it for a profit, we can just stay there.  We would both still have our full time jobs to fall back to.  And 2 years is plenty of time to do almost everything ourselves.

What is wrong with this strategy?  How come pretty much no one on the internet is talking about this type of strategy?  How come everyone is busy talking about the way property brothers do it?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Lam N., the reason you're not finding much info on it is because you're mixing contemporary slang.  A "flip" is commonly know as a property  you purchase to fix and immediately sell (flip).  It is viewed as a quick process.

What you're talking about is application of the primary residence exclusion of sec 121 IRS code.  You can read about it in publication 523 from the IRS.  Since you must have lived in the property for 2 out of the 5 years immediately prior to sale it is not seen as a quick "flip" kind of thing.  But its been around for a long long time.  First it was a one time exemption but with a huge adjustment in 1987 you can now use the 121 exemption every two years.  Yes it's tax free up to $500K of profit if you're married.  and yes it's the greatest thing going if  you don't mind moving once in a while.

@Joel Cummings, This is superior to the 1031 because it's tax free instead of tax deferred.  Also, you cannot do 1031s on your primary residence so this is the tax mitigation strategy for your primary.  1031s are the tax mitigation strategy for investment property.  You cannot use the primary residence exclusion for a piece of investment property.

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  • Chris Mercer
    Rental Property Investor · Denver, CO · Member since 2015 · 13 posts · 1 vote
    8y

    Update to my post from a few days ago:  I found a great article on fix-and-flip taxes and how those taxes behave in various scenarios, including 2 year live-in projects.  Basically, all costs and expenses are rolled up at the time of sale and, if done correctly (2 years out of 5 years as primary residence), then the gains are not taxable and all of the associated expenses are deductible.  Pretty good scenario for the patient investor!

    https://fitsmallbusiness.com/taxes-on-flipping-houses/

    1Reply
  • Bennie R Patterson
    Member since 2018 · 1 post · 0 votes
    7y

    Hello everyone, I am in a situation currently with a lake home thats valued at 130k.  My family and I have been here three years.  I still have some repairs but it should be all fixed and worth closer to 230k next year (if not more).  

    I have spent ALOT of time fusing stuff thus far.  My parents went through a nasty divorce and I made them a deal for the home during the split since they were going to lose it probably.  Part of the deal was I gave my homeless sister and her family my old home (smaller mobile home).

    Anyhow....next year when everything is finished I'm thinking I will basically have a 4 year gain of about 180k....my wife and I was thinking we should start with the live and flip but look at it more as 'potential family homes' that we could also make a buck if opportunity knocks.  Does this sound feasible?  ...it scares my wife....I was running the numbers and seems like I could almost quit my job and do this exclusively, already owning my home outright.

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  • Taylor Knott
    Blue Lake, CA · Member since 2019 · 33 posts · 4 votes
    6y
    Originally posted by @Chris Mercer:

    Update to my post from a few days ago:  I found a great article on fix-and-flip taxes and how those taxes behave in various scenarios, including 2 year live-in projects.  Basically, all costs and expenses are rolled up at the time of sale and, if done correctly (2 years out of 5 years as primary residence), then the gains are not taxable and all of the associated expenses are deductible.  Pretty good scenario for the patient investor!

    https://fitsmallbusiness.com/taxes-on-flipping-houses/

    I appreciate you finding this article. My fiancé and I are moving from Humboldt County in Northern California back home to Napa County, CA. Cost of homes is insane. We are about to get into a fixer and rehab over 2 years. This article is going to better explain what we are getting into for my fiance. Thank you! 

    1Reply
  • Chris Mercer
    Rental Property Investor · Denver, CO · Member since 2015 · 13 posts · 1 vote
    6y
    Originally posted by @Taylor Knott:
    Originally posted by @Chris Mercer:

    Update to my post from a few days ago:  I found a great article on fix-and-flip taxes and how those taxes behave in various scenarios, including 2 year live-in projects.  Basically, all costs and expenses are rolled up at the time of sale and, if done correctly (2 years out of 5 years as primary residence), then the gains are not taxable and all of the associated expenses are deductible.  Pretty good scenario for the patient investor!

    https://fitsmallbusiness.com/taxes-on-flipping-houses/

    I appreciate you finding this article. My fiancé and I are moving from Humboldt County in Northern California back home to Napa County, CA. Cost of homes is insane. We are about to get into a fixer and rehab over 2 years. This article is going to better explain what we are getting into for my fiance. Thank you! 

    Hi Taylor - I'm glad you all are moving back to where you truly want to be!  I can't say with 100% certainty, as I am no longer in this situation, as I sold that property, but I heard through the grapevine that the Feds removed the 2-out-of-5-years-as-a-primary-residence law.  So basically, as I understand it, you can do a live-in flip and sell as soon as you want to, without being heavily taxed.  Again, I'm not 100% sure, but something sure worth looking into.

    Good luck on the move and future investments!

    Cheers,

    Chris

    0Reply
  • Nicole Holcomb
    Realtor · Encinitas, CA · Member since 2020 · 125 posts · 92 votes
    6y

    @ Lam N.

    The 2 year DIY live in flip is an awesome strategy, do it!

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