Two years is the floor. Is it also the target?

Question

Three deals in, and the ceiling I keep hitting is how many I can run at once. So I've been looking at a live-in flip as a way to get one project working for me on a different clock.

The tax rule everyone points at is the primary residence gain exclusion, which generally needs you to have owned and lived in the place for at least two of the last five years. Details and dollar limits are a professional's question, so I'm not going to pretend to know your situation.

What I want to argue about is what you do with that two years. Two camps as I see it.

Camp one treats two years as a deadline. Renovate hard in the first ten months, live in a finished house for the back half, list the day you clear the residency test. You get your money back out fastest, you know your exact sale month going in, and you only eat the construction-zone lifestyle once.

Camp two treats two years as a floor and holds three or four. You spread the work thin, pay for materials out of income instead of borrowing, and you get to pick your selling season instead of taking whatever market shows up in month twenty-five. You also stay inside the five-year window with room to spare if something goes wrong.

For a beginner the first camp sounds disciplined and the second sounds lazy, but slower has been cheaper for a lot of people I know. Which is it in practice?

nataliehsu · Answer

Reading this from the side of someone who'd be working on these rather than owning them, the two camps produce completely different jobs. Camp one is a real project with a schedule, subs who can plan around it, and someone paying draws. Camp two is a homeowner calling me every eleven weeks for a two-day job, which I price higher per day because of the drive and the setup. If cheap labor is part of why the slow version pencils, the labor probably has to be your own hands, not mine.

luis_carrera · Answer

I've built the spreadsheet for both versions of this about four times now and the answer flipped depending on one line, which is what I assumed about the selling month. If I let the model pick the best month in a range, the longer hold wins by a wide margin. If I force a specific month, the fast version wins because holding costs and my own patience have a price. So the model isn't telling me anything about live-in flips, it's telling me I don't know what the market does in month twenty-five. Which is fair, nobody does.

jessreyes12 · Answer

The question I've been embarrassed to ask is what happens to the residency clock if you move out early. My understanding is you get the ownership and use tests measured across the five years before the sale, so moving out in month twenty-five and selling in month thirty can still work, but that's exactly the kind of sentence I shouldn't be building a plan on without a CPA looking at my facts. Keystone, does camp one actually mean you list at twenty-four, or that you stop living there at twenty-four?

joe_delgado5 · Answer

Compass, listing and moving out are two different dates and I've seen people conflate them badly. On the camp question, I run thin margins on fast deals and the thing I envy about the live-in version is that nobody is charging you interest for being slow. My last flip cost me about $2,900 a month just to exist while a countertop guy rescheduled twice. If your carrying cost is rent you'd pay anyway, then time is close to free, and free time argues for camp two every single day.

Two years is the floor. Is it also the target?

4 replies