Live-In Flip Strategy
The IRS allows you to enjoy a lot of tax benefits. These benefits are right before you; however, you have to look closely to see them. One of these benefits is the live-in flip strategy and the Internal Revenue Code (IRC) section 121. Below we will discuss this strategy and how to take advantage of this specific tax code while investing in your primary residence.
What is a Live-In Flip?
The live-in flip is when you buy a property and live in it for a minimum of 2 years, after which you upgrade that property to increase its market value and then sell it. Based on IRC section 121, you can exclude the gains from the sales of this property up to a certain dollar amount.
IRC Section 121
IRC Section 121 allows a qualifying taxpayer to exclude up to $250,000 if filing Single or Head of Household, or $500,000 if filing Married Filing Jointly. The taxpayer must pass the USE and OWNERSHIP test. In short, these tests mean the taxpayer must use the home as a primary residence for a minimum of 2 of the last 5 years and the taxpayer must own that home during this time.
In addition, the IRS allows you to enjoy the privilege of section 121 once every two years, and the date is based on at least a day after the selling date of your previous property. For instance, if John sold his previous property utilizing IRC section 121 on the 20th of February 2020, he has to wait till at least the 21st of February 2022 to enjoy the benefit of section 121 again.
If you are utilizing the live-in flip strategy, you must be very mindful of IRC section 121, as it can allow you to potentially exclude the gains.
This is how you can utilize the live-in flip strategy and take advantage of section 121 exclusion to reduce your taxable income significantly. However, this one, too, has some exceptions. It would be best if you discussed these exceptions with a tax professional. In addition, some items are not always listed in the section 121 exclusion, which you may not realize early enough. In such cases, we recommend you call your financial advisor and a tax professional to know if it is a valid exclusion for you.