Selling Old Home And Buying New Home Without Capital Gains Serial Home Seller Tax Exemption, Part 3 – Advantages and Disadvantages

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Serial Home Seller Tax Exemption, Part 3 – Advantages and Disadvantages

Serial home sellers buy homes, live in them for at least 2 years, then sell them and pay no federal capital gains tax. There are both advantages and disadvantages to consider before entering into this type of business.

Benefits of selling your home every two years and claiming the exemption:

1. No more tenants

One of the biggest concerns for real estate investors is tenant issues. In fact, based on what I’ve heard from former investors I’ve talked to, this is probably the number one reason investors decide to exit the business. The next best thing to holding back and learning how to deal with tenants through the school of hard knocks is not having tenants at all.

2. Lower interest rate

Owner-occupiers can pay up to 1% less on their mortgage than people who don’t live in their investment property. For a $200,000 home, that could be an extra $132 a month or $1,584 a year that you don’t pay on your mortgage.

3. You control the entire process

When you become a serial home buyer/seller and move from one home to another every two years, only you are in complete control of your investment future. You are the captain of the ship.

Since you’re living in the house, maybe while you’re fixing it up, you’re just making the mortgage payments you’d be making anyway if it weren’t for your business. That way, you don’t have any extra money except for closing costs when you buy or sell.

If you decide to live in the house for a few more years, no problem. You can live there as long as you want, 20 years if you want, and still be exempt from taxes.

Disadvantages of using the biennial exemption:

1. No long-term profit

In addition to losing the headaches associated with tenants, you also lose many of the benefits of selling instead of renting. You lost:

a. Monthly rent. They are easy to get used to once they start coming in.

b. Tenants who gradually pay off the mortgage for you.

c. Tax deduction for depreciation and interest on the loan.

d. You lose the long-term appreciation of 5% per year. It’s nice to be able to capitalize on that appreciation by selling a house or two when you’re ready to retire.

2. It is difficult to time the market

This is not so much a disadvantage of the exemption as a disadvantage of running a business of buying and selling every two years. With this investment strategy, you may not be able to time your home buying and selling around market fluctuations. For example, many will say that now is not the best time to sell. Some real estate analysts say cycles typically last 2 to 10 years, and naturally, the ideal time to sell is when demand is high and prices are rising.

“The biggest lesson I’ve learned in real estate is that there are no absolutes except yourself. Prices fluctuate; products change. Markets move up and down. Tax laws are rewritten every year. Interest rates are as predictable, like non-wired champagne corks. But there is one constant element in all of this: the man who repairs for profit.”

Disadvantages of using the biennial exemption

1. No long-term profit

In addition to losing the headaches associated with tenants, you also lose many of the benefits of selling instead of renting. You lost:

a. Monthly rent. They are easy to get used to once they start coming in.

b. Tenants gradually pay the mortgage for you.

c. Tax deduction for depreciation and interest on the loan.

d. You lose the long-term appreciation of 5% per year. It’s nice to be able to capitalize on that appreciation by selling a house or two when you’re ready to retire.

2. It is difficult to time the market

This is not so much a disadvantage of the exemption as a disadvantage of running a business of buying and selling every two years. With this investment strategy, you may not be able to time your home buying and selling around market fluctuations. For example, many will say that now is not the best time to sell. Some real estate analysts say cycles typically last 2 to 10 years, and naturally, the ideal time to sell is when demand is high and prices are rising.

A similar problem exists when buying your property, you can get caught in a cycle where prices are artificially inflated.

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