Real Estate Corner: Flipping Your Primary Residence
The fix & flip concept for real estate investors is a strategy that many have chosen either as their full-time career or to supplement their income. Done properly, strategically, and with a little market luck on their side, many of these investors have seen success and profits.
One of the downsides to investing in a flip, is the carrying costs of the property that will be incurred before it sells: costs such as monthly mortgage payments, property taxes, insurance, utilities, property maintenance, Realtor commissions and closing costs. These carrying costs are one reason why some choose to fix & flip a home that they’ll be living in – their primary residence. The basic idea behind primary residence flipping is to buy a home below market value, move into it, make the necessary updates and renovations, and then resell it after the required two-year waiting period.
There can be some advantages to this. If you live in the home you’re renovating, you’ll only have one set of expenses and carrying costs, which can relieve some of the stress and anxiety to get renovations done as fast as possible and allows for less pressure to sell quickly.
You’ll also be able to avoid paying capital gains tax by living in the property for at least two of the last five years after you’ve purchased it. This is known as the Section 121 Exclusion in the tax code which allows you to avoid paying taxes on $250,000 of the capital gains (filing as an individual), or $500,000 filing jointly as married. That’s quite a savings.
There could be downsides to this too. The requirement to live in the home for a minimum of two years before you can sell it may be a hinderance to profits as you’ll be at the mercy of the ebbs and flows of the real estate market. The possibility of not being able to put the home up for sale when the market is running hot can be a disadvantage.
You’ll also have to deal with living through the renovations and be ready to move again relatively quickly. However, for some, these are minor inconveniences when weighed against the profits that can be made. Of course, you’ll also want to consult your CPA or financial advisor before you make an investment.
We have a lot of experience in helping our clients to strategically choose the right property for such an endeavor. In fact, North Scottsdale has a fair share of homes that, when updated, will sell for quite a bit more than their current value. Contact us and we’ll give you a dossier of properties to consider.
602.320.8415 or Lucky@RussLyon.com