How to earn up to $250,000 tax-free every 24 months

Profile of a 'serial home seller'
By: Robert J. Bruss: Inman News
Have you ever met a "serial home seller?" I have. They are fascinating people, usually the "handyperson type." They also enjoy bragging about how much tax-free profit they earn buying and selling fix-up houses.

Perhaps you're getting the picture.

THE SECRET FIVE STEPS FOR EARNING $125,000 TAX-FREE PER YEAR Virtually every homeowner knows about the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly).

To be eligible for this tax exemption benefit, home sellers must have owned and occupied their principal residence at least 24 of the 60 months before its sale. Millions of home sellers use this tax break each year.

However, few home sellers use this tax exemption to create a repeatable tax-free home sale business every 24 months. Here's how to create your own tax-free home sales business:

(1) Buy a sound, well-located house needing cosmetic fix-up work.

(2) Move in, making it your principal residence for at least 24 months.

(3) Fix up the house, making profitable improvements, which cost less than the market value they add.

(4) Sell the house at a tax-free profit not more than $250,000 ($500,000 for qualified spouses).

(5) Repeat every 24 months.

HOW TO CREATE PROFITABLE HOME IMPROVEMENTS

Years ago, Mark Haroldson wrote the book "Wake Up the Financial Genius in You," which invented the term "forced inflation." The author explained that term means adding more real estate market value than the improvements cost.

Examples of profitable cosmetic improvements include painting (the most profitable home improvement of all, often adding $5 or more of market value for each $1 spent), new light fixtures, fresh landscaping, new carpets and flooring, and adding a second bathroom to a one-bathroom house.

Examples of unprofitable structural improvements (which don't add as much market value as they cost) include new roof, foundation repairs, plumbing replacement, new wiring, siding replacement, and window replacement.

In the classic best-selling real estate book of all-time, the late William Nickerson's "How I Turned $1,000 into $5 Million in Real Estate in My Spare Time" suggested the sound basic formula of spending $1 to add at least $2 in market value by making profitable cosmetic improvements.

However, some improvements are obviously necessary, such as a new roof or new wiring, but they won't add as much market value as they cost. Thankfully, other improvements often add $2 or even $3 in market value for each $1 of expense.

Some home improvements are "break-even." Examples include kitchen remodeling and bathroom upgrades. Before undertaking such expensive renovations, consider their influence on the home's ultimate resale value and the home's marketability. Ask yourself "Is this improvement really necessary?"

THE MAJOR DRAWBACK OF BEING A SERIAL HOME SELLER

Just in case you haven't yet figured out the major drawback of repeatedly buying and selling homes approximately every 24 months, it is living in the house while the fix-up work occurs. Marriages have been known to end in divorce while a home is being renovated, especially if the kitchen isn't useable and the family must suffer dining out every night.

A bit of advance planning can pay off. For example, after you purchase a fix-up house, having the upgrading work completed before moving in will avoid the hassles of having workers around. My neighbors took another approach: they spent the summer in Europe while their home was completely remodeled so they could come back to a virtually new renovated home.

THE BONUS ADVANTAGE OF BEING A SERIAL HOME SELLER

Home market value appreciation is a bonus advantage, on top of "forced inflation," of being a serial home seller.

In the last 10 years, U.S. homes have enjoyed the greatest market value increase in history. Percentage market value increases vary wildly by community, but houses in most towns have benefited from at least 75 percent increased market value during the last decade.

Historically, houses appreciate about 5 percent annually in market value. But some economically depressed areas have lower or even negative appreciation. Of course, you wouldn't want to become a serial home seller in such a community lacking sound economic conditions.

MISTAKES TO AVOID

If the idea of earning up to $250,000 tax-free (up to $500,000 for a qualified married couple) every two years by purchasing and living in a fixer-upper house appeals to you, there are some pitfalls to avoid:

(1) Avoid buying a house in excellent condition (it lacks fix-up profit potential).

(2) Avoid buying a "tear down" or "scraper" house. If you acquire such a property, be sure you don't pay more than its land value alone. Profiting from such run-down houses is extremely difficult.

(3) Avoid condominiums and townhouses. Even if you find a condo or townhouse needing profitable improvements, there is usually little profit opportunity because the market value is held down by recent sales prices of comparable condos and townhouses in the vicinity. You can fix up your unit to look great, but if the surrounding units are run-down, you won't earn much profit.

(4) Avoid buying a house in a bad location, high crime area, or a poor quality school district. As with any house purchase, these three criteria of home buyers will hold down the resale value of a house no matter how nice you fix it up.

HOW TO FIND PROFITABLE FIXER-UPPER HOUSES

The best way to find profitable fixer-upper houses is to work with a savvy buyer's agent who knows the local market.

After explaining your criteria, your agent will alert you when a house meeting your standards hits the market, whether it is listed in the local multiple listing service (MLS) or is a "for sale by owner" (FSBO).

Additional sources of profitable fixer-upper houses include foreclosures, probate and bankruptcy properties, and even vacation or second homes. As always, the key to profit success is spotting houses needing profitable improvements. In other words, look for "the right things wrong" if you want to earn up to $250,000 tax-free every 24 months.

More details are in my new special report, "How to Earn Up to $250,000 (or $500,000) Tax-Free Profits Every 24 months Buying and Selling Houses," available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com.