Charged myself rent for two years and it still cleared, by less than I'd claimed

Finished and closed a 24-month live-in flip in a mid-size midwest metro, and then I did the accounting I'd been avoiding.

Headline version: bought 195k, spent 61k over two years (about 18k of that was my own weekends valued at zero), sold 448k, selling costs 27k. Gain about 165k, all of it inside the exclusion for a married couple, so nothing taxable there. My CPA signed off on the residency test and I'd tell anyone to get that confirmed rather than assume it.

Here's what I don't see people subtract. Before this house I rented for 1,450 a month. My mortgage, taxes and insurance on the flip ran 2,180. So I was paying 730 a month more than my alternative housing, which is 17,520 over the hold. My down payment and closing costs were 46k of my own money sitting still for two years. And the 18k of my own labor wasn't free, it was Saturdays. Charge those honestly and the 165k becomes something closer to 120k of real economic gain, plus whatever you think 200 weekends were worth.

120k tax-free over two years on 46k in is still a result I'd take again. The number that nearly broke it was the roof, quoted at 9k in year one and 16k when I actually did it in year two. If I'd waited another six months it would've eaten the entire margin over my rent alternative.

What I'd keep: a monthly line in the spreadsheet for housing cost versus my rent alternative, so I always knew the true carry rather than pretending it was zero because I'd be living somewhere anyway.

Answer

2Rena Expert

The delta @halyard is pointing at is where most live-in flip models go soft, and @ledger's framing is the right one: carrying cost isn't zero, it's the difference between the project house and the housing you'd otherwise have paid for. On these numbers that difference is 17.5k, which is about 10 percent of the gross gain. That is a real number and it belongs in the underwriting.

On the tax side, the exclusion mechanism depends on satisfying both the ownership and use tests over the five years before sale, and how it applies to a particular sale is a question for a CPA looking at your facts. Confirm current thresholds and rules in writing before you build a model on them.

The assumption doing the heaviest lifting in this post is not the tax treatment, it's the 448k sale. Basis plus spend is 256k. Selling at 448k means the market and the renovation together produced 192k of value on a 195k house. If that same house sold at 390k, gain drops to about 107k gross, and after the rent delta and the 46k of dead equity for two years, the result looks materially different while the tax treatment is identical.

One more line worth adding to the monthly sheet: the roof going from 9k to 16k is a materials and labor escalation you carried because the timeline is long. The relaxed schedule that lets you self-perform also exposes you to price drift on anything you defer. Get firm written quotes with expiry dates and decide deliberately when to spend rather than defaulting to later.

3 replies

4ryanmck27SC2C

The 730 a month delta is the line I'd never have written down. Everyone I've listened to says carrying costs vanish on a live-in flip because you'd pay rent regardless, and that's only true if the house costs the same as the rental you left. Mine wouldn't, not close. Did you know the delta before you bought, or did you find it in month three?

1diane_kowalskiPassivePRO9

The 46k sitting still for two years is the part I'd weigh hardest, since that's exactly the money I'd otherwise be putting into land and just holding. You got a tax-free 120k out of it, so it clearly beat sitting, but the roof story suggests the deferred-work advantage cuts both ways. I'd want a written quote per item and a decision date on every one of them.