Home Ownership for Profit

By Steve Gillman - 2006

Many people have written about and talked about the benefits of home ownership. As a home owner, you get to build equity by buying instead of renting, of course. You also get a tax deduction for the interest paid on mortgage loans (if you itemize). Then you get more equity from appreciation in house values over time. You know all of this right?

Good. But you might not know about an even bigger opportunity to profit from home ownership, due to a change in the tax law that was quietly made years ago. Taking advantage of this opportunity does require that you think about your home as an investment,. You also have to be willing to move every few years or so, but only to claim your large tax free profits.

Home Ownership - Tax Free Profits

In the past, you could sell your home without paying capital gains tax on the profit, but only if you rolled the gain into a more expensive house. You could also take an exclusion from capital gains tax on the sale of your home once in your life. This allowed you to down-size in retirement without having to pay tax when you sold your house.

Now, however, the tax code allows anyone to sell a home at a profit without rolling the gain into the next home - and without paying any tax on the gain. Get with a tax expert for the more intricate rules, but essentially you are free to sell at a profit without paying taxes on the gain if you have lived in the home at least two of the past five years. You can take advantage of this every two years. (Total gain excluded is limited to $500,000.)

You can move every two years, selling your home for a profit each time, and not pay capital gains tax. Alternately you can move out, rent our house for up to three years, and then sell it without capital gains tax. You can see how home ownership can become very profitable if you do this right.

A man in Arizona bought homes just to live in them for two years and sell them. He concentrated on houses that needed work, then bought them cheap, fixed them up, and sold them for large profits after two years in them. For example, he might buy a fixer-upper in a neighborhood of $200,000 homes for $120,000, then make it worth $200,000 with $20,000 worth of work (and his time). He could sell it for $280,000 two years later.

Now, this was when 20% annual appreciation happened year after year (2001 -2006). However, even if you buy a home for $200,000 and do nothing, 5% appreciation makes it worth $243,00 in four years, still enough appreciation for a profit after the costs of selling. Negotiate the purchase price down to $190,000 and you add another $10,000 profit. Add $50,000 in value to with $20,000 in repairs to a fixer-upper, and you can see how this strategy can really get profitable.

Suppose you don't want to move every two years and make your homes into a business plan? You should still keep the opportunity in mind. When you move for other reasons, and you are in a rising market, you can rent out your home (assuming you have the resources to buy the new home without selling this one) for up to three years and still qualify for this special tax treatment when you sell.

If you have 12% appreciation in the area, it would mean a $240,000 home is worth $337,000 in three years. Assuming no damage from the renters and rent that covered costs, that's an extra $97,000 profit - on top of any gain you had up to the point when you moved. And it's tax free! Who knew that home ownership could be so profitable? You do now.

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