I think a homeowner may have to wait longer than 2 years
before selling a home, considering all the costs that go into selling
a home, and then getting a new loan on the next, more expensive home.


A serial homeowner can make a financial killing

By Jay MacDonald • Bankrate.com


Dan Shiner is thinking of becoming a serial killer.

No, not the grisly made-for-TV variety. Shiner is toying with the idea
of living serially in his rental properties for the two years required
by the Internal Revenue Service to avoid capital gains tax, then
making a tax-free killing when he sells them.

If he does it right, in as little as four years, he and his wife could
legally walk away from two of their Mill Valley, Calif., properties
with a cool $1 million profit -- absolutely tax-free.

Thanks to the 1997 Taxpayer Relief Act, single homeowners can exclude
from capital gains tax up to $250,000 of the profit from selling their
principal residence; couples filing jointly can exclude up to
$500,000. Exceed those thresholds, and the IRS will tax the excess up
to 15 percent.

There are a couple of restrictions. You must have used the property as
your primary residence and lived there for an aggregate of at least
two of the five years prior to the sale, and you can only take such
exclusions once in any two-year period.

For most sellers, those requirements beat the prior law.

Continued below


Home sale profits, then and now
When the law was changed, homeowners welcomed the rare good news from
the IRS. The tax code previously allowed some home-seller breaks, but
they weren't nearly as generous.

Under the old law, Shiner would have had to roll his gain into an
equal or more expensive property, and that would have only deferred
his tax to a later year.

"Actually, my wife and I are looking to downsize in a few years
because we have three kids, one in college, one who starts college
next year and one who is 10," he says. "We have a five-bedroom house,
which doesn't make sense, so we are thinking of buying something
smaller."

The previous over-55, once-in-a-lifetime exemption of $125,000
wouldn't have helped the Shiners much either. The home they bought 20
years ago for $157,000 is worth in the neighborhood of $800,000 today.

Now they face the attractive prospect of becoming millionaires before
their nest is empty. Their two rental properties are paid off; their
home will be shortly.

"We still haven't decided what we're going to do," Shiner admits.
"Theoretically, we could move into one of our rentals for a couple of
years, sell our primary residence which we would have lived in three
and four years ago, keep the half-million from that, then sell the
rental property and keep the half-million from that and come up with
$1 million clean and be completely within the law. There are a lot of
options for us right now."

It's a nice "problem" to have. And it's one that may become widespread
as soon as baby boomers with rapidly emptying nests consider becoming
serial killers themselves.


Ready to find a mortgage? Check rates in your area.


Anatomy of a serial killer
"Most people haven't figured this out; they haven't connected the
dots," says Tom Lucier, real estate investor and author. "You have an
opportunity for tax-free income, it provides you shelter, you don't
have to worry about tenants so you eliminate property management and
chances of vandalism, and you don't have to pay any taxes. If you buy
right, it's risk-free."

Lucier says certain types of homeowners may make the best serial
killers:

Singles
Married couples with preschool-age children
Childless couples
Empty nesters
Landlords with single-family rental houses
While not everyone is in the enviable position to reap a tax-free
half-million on the sale of property, even smaller exclusions can pay
big dividends, whether you're a retiree looking to supplement your
income or a twenty-something scratching for seed money to invest for
the future.

The key, however, is buying the right property. Lucier says serial
killers in particular should adhere closely to his landlord maxim:
Never buy a property in an area that you wouldn't want to live in
yourself. After all, part of the plan is you will eventually live
there, at least for two years and quite possibly more.

"Two years is an awfully short window," says Shiner. "There have been
two-year slides [in housing prices] almost everywhere, even in Marin
County."



(continued on next page)
http://www.bankrate.com/brm/news/rea...20040513a1.asp


==
"You make a living by what you get, you make a life by what you give."
-- Winston Churchill

Ablang wrote:

I think a homeowner may have to wait longer than 2 years
before selling a home, considering all the costs that go into selling
a home, and then getting a new loan on the next, more expensive home.

I would agree--you have to consider the transaction costs in any
"plan" to try and use the gain exclusion--you shouldn't let the tax
tail wag the economic dog. As well, it needs to *really* be your
principal residence for that two year period--we've already had one
case where a taxpayer lost on that issue both because he couldn't
meet the mechanical date quasi-safe harbor in the regulations and
his other actions were inconsistent with the claim that the
residence in question was his principal residence (Guinan v. United
States, 91 AFTR 2d 2003-2174).

Finally, it's important to consider that we appear to be in an
"unusual" housing market in many parts of the country, with a
current rush to buy driven by fears that rates are going up. My
totally uneducated guess is that this may mean that what we see
right now is simply a rush by anyone who has plans to buy in the
next year or so trying to get in now. There's a real question in my
mind about what happens once that group gets their homes, especially
if rates do continue to increase.

That is, the question is what will the supply of buyers be in two
years when you go to execute your "sell the property" side of the
equation? I have been around long enough to see slow real estate
markets and people who have sold at losses--sometimes
substantial--in locations where "everyone knew" that values would
just continue to grow when the houses were initially purchased.

--
Ed Zollars, CPA
Phoenix, Arizona