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  • Optimum House Buying/Renting Strategy

    What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

     

    My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

     

    Is this logic valid?

     

    Any other strategies out there?

  • #2




    What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

     

    My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

     

    Is this logic valid?

     

    Any other strategies out there?
    Click to expand...


    Yes, but moving really sucks so it will get old after the second move so its not very practical.

    I dont understand why you'd pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you'd throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

    You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.

    Comment


    • #3
      Moving sucks.  When you're young and smaller houses and moveups, that's fine.    If you're in an environment of high appreciation, this strategy works for the first few cycles as the appreciation outpaces the rental cashflow.

      And if you're doing this, maximize leverage.  20% down, take the rest and invest in true rental real estate.

      Comment


      • #4
        Moving sucks and is expensive.  It seems to me that a life with minimal moves is best.

        Comment


        • #5
          Ugh that sounds awful. Even if it was guaranteed to make money I would still not do it. And it is not even guaranteed. What if housing does not appreciate?

          Comment


          • #6
            The only problems I see with this are:
            •It’s going to be a lot of work.
            •Not sure if the goal is really making money or creating a home.
            •The business model is flawed by not leveraging. The logic of “free rent” by paying cash usually doesn’t workout with the numbers.
            •Landlord responsibilities increase where a management company starts being attractive but drains the cashflow.
            •Rinse and repeat in rental properties is difficult to sustain.

            A residential portfolio is feasible, usually leverage and one spouse needs to run the business.

            Comment


            • #7




              Ugh that sounds awful. Even if it was guaranteed to make money I would still not do it. And it is not even guaranteed. What if housing does not appreciate?
              Click to expand...


              As long as it breaks even I make money factoring no interest on a mortgage and rental income for 3 years.

              Comment


              • #8
                Why not buy the house in full? Even if I write off the mortgage interest in only saves my my tax bracket percentage in the end so I still end up paying more for the house in the end with a mortgage.

                Comment


                • #9







                  What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

                   

                  My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

                   

                  Is this logic valid?

                   

                  Any other strategies out there?
                  Click to expand…


                  Yes, but moving really sucks so it will get old after the second move so its not very practical.

                  I dont understand why you’d pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you’d throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

                  You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.
                  Click to expand...


                  I could pay a moving company to move everything and still be profitable. Plus I'm tlaking about small homes or townhouses. And we don't accumulate a lot of stuff.

                   

                  Please elaborate on the benefits I am losing by paying full price. What am I missing?

                  Comment


                  • #10




                    Ugh that sounds awful. Even if it was guaranteed to make money I would still not do it. And it is not even guaranteed. What if housing does not appreciate?
                    Click to expand...


                    Then I continue renting it out?

                    Comment


                    • #11










                      What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

                       

                      My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

                       

                      Is this logic valid?

                       

                      Any other strategies out there?
                      Click to expand…


                      Yes, but moving really sucks so it will get old after the second move so its not very practical.

                      I dont understand why you’d pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you’d throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

                      You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.
                      Click to expand…


                      I could pay a moving company to move everything and still be profitable. Plus I’m tlaking about small homes or townhouses. And we don’t accumulate a lot of stuff.

                       

                      Please elaborate on the benefits I am losing by paying full price. What am I missing?
                      Click to expand...


                      I've basically done this before, it still sucks, no two ways and older you get the less sense it makes.

                      6% on either side of the trade on that money, and the opportunity cost.

                      Comment


                      • #12













                        What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

                         

                        My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

                         

                        Is this logic valid?

                         

                        Any other strategies out there?
                        Click to expand…


                        Yes, but moving really sucks so it will get old after the second move so its not very practical.

                        I dont understand why you’d pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you’d throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

                        You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.
                        Click to expand…


                        I could pay a moving company to move everything and still be profitable. Plus I’m tlaking about small homes or townhouses. And we don’t accumulate a lot of stuff.

                         

                        Please elaborate on the benefits I am losing by paying full price. What am I missing?
                        Click to expand…


                        I’ve basically done this before, it still sucks, no two ways and older you get the less sense it makes.

                        6% on either side of the trade on that money, and the opportunity cost.
                        Click to expand...


                        For sale by owner just cut your rate in half.

                        Comment


                        • #13
                          Good luck with the timing of your sale. Usually, depreciation is the driver on rental properties, with 1031 being the deferral. Check that out too.
                          Purchase and sale dates are hard to nail down in advance. Hindsight is great and easier for the IRS. I’ll let you workout the front end load of the 2 yr residency so you don’t come up one week short. Is it possible the roof or A/C comes up on the Buyer’s bank inspection/appraisal delaying closing? You can plan on FSBO and DIY repairs and moves, but if you have a job that’s going to cramp your time and deadlines.
                          Hope your forecasted appreciation is worth it. Rather than years, layout the time line and back it up with dates and amounts that show the dollars and compliance with “rinse and repeat”. Make sure to include whatever transaction costs you feel are appropriate. Buying and selling and moving cost time and/or expense. You might find paying cash and simply moving up in 5 years is an alternative. Just don’t want you stuck with two houses, no tenant, and no tax benefit when a sale falls through.

                          “Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.”

                          The five years runs from the date of sale. Your 2 year residency has an expiration date. At a minimum, not sure you got the rent/occupancy month’s optimized.

                          https://www.irs.gov/publications/p523
                          https://www.irs.gov/taxtopics/tc701
                          https://apiexchange.com/irc-section-121-and-irc-section-1031/




                          Comment


                          • #14
















                            What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

                             

                            My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

                             

                            Is this logic valid?

                             

                            Any other strategies out there?
                            Click to expand…


                            Yes, but moving really sucks so it will get old after the second move so its not very practical.

                            I dont understand why you’d pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you’d throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

                            You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.
                            Click to expand…


                            I could pay a moving company to move everything and still be profitable. Plus I’m tlaking about small homes or townhouses. And we don’t accumulate a lot of stuff.

                             

                            Please elaborate on the benefits I am losing by paying full price. What am I missing?
                            Click to expand…


                            I’ve basically done this before, it still sucks, no two ways and older you get the less sense it makes.

                            6% on either side of the trade on that money, and the opportunity cost.
                            Click to expand…


                            For sale by owner just cut your rate in half.
                            Click to expand...


                            Everything works out on paper...then it doesn't.  That's the problem.  buying/selling houses and market timing is even more tenuous in RE than stock market.

                            FSBO sounds easy and fun -- it isn't.

                            Full price?  Opportunity cost of 80% not used to leverage buy two more homes if you're banking on appreciating houses that much.

                            eg:  1million  home:   20% YTY - x2 years = 1.4M --   buy full price;  $1M cash - 1.4M returned - 40% gain.

                            1M with buying 3 homes at 33% down:  1.0M  sell 1.4M;   = 1M invest 1.2M +1M back - 2.2M returned - cost 2 years on 1.8M interest 5% simple = 180k =  2M returned ---   that's 600k more over 2 years because of leveraged buy -- that's your opportunity cost of buying full cash instead of leveraging.

                            So if you're going to do this, do it efficiently right.

                             

                            Comment


                            • #15



















                              What is the optimum house buying/renting strategy to take advantage of Section 121 and other tax advantages?

                               

                              My plan is to buy a house in full (no mortgage), live in it for 2 years then buy another house to live in and rent out the previous home for 3 years then sell it to avoid tax on any profits under Section 121. Rince and repeat moving into a new house every 2 years.

                               

                              Is this logic valid?

                               

                              Any other strategies out there?
                              Click to expand…


                              Yes, but moving really sucks so it will get old after the second move so its not very practical.

                              I dont understand why you’d pay full price? You lose a lot of the benefit that way. You want to have just enough equity to hit the limit and not much more. I dont get why you’d throw the cash up against the transaction costs on either side as the benefit is overall small without appreciation.

                              You could live until appreciation was in the ball park or cash out refi enough to where you make sure a sale would keep you just under the equity limits.
                              Click to expand…


                              I could pay a moving company to move everything and still be profitable. Plus I’m tlaking about small homes or townhouses. And we don’t accumulate a lot of stuff.

                               

                              Please elaborate on the benefits I am losing by paying full price. What am I missing?
                              Click to expand…


                              I’ve basically done this before, it still sucks, no two ways and older you get the less sense it makes.

                              6% on either side of the trade on that money, and the opportunity cost.
                              Click to expand…


                              For sale by owner just cut your rate in half.
                              Click to expand…


                              Everything works out on paper…then it doesn’t.  That’s the problem.  buying/selling houses and market timing is even more tenuous in RE than stock market.

                              FSBO sounds easy and fun — it isn’t.

                              Full price?  Opportunity cost of 80% not used to leverage buy two more homes if you’re banking on appreciating houses that much.

                              eg:  1million  home:   20% YTY – x2 years = 1.4M —   buy full price;  $1M cash – 1.4M returned – 40% gain.

                              1M with buying 3 homes at 33% down:  1.0M  sell 1.4M;   = 1M invest 1.2M +1M back – 2.2M returned – cost 2 years on 1.8M interest 5% simple = 180k =  2M returned —   that’s 600k more over 2 years because of leveraged buy — that’s your opportunity cost of buying full cash instead of leveraging.

                              So if you’re going to do this, do it efficiently right.

                               
                              Click to expand...


                              That increases my risk though.

                              Comment

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