Why the Owner Occupant Sales Exclusion Strategy Is So Powerful
Authors of The Book on Advanced Tax Strategies, Amanda Han and Matt MacFarland explain the owner occupant sales exclusion strategy.
Amanda & Matt's website: https://www.keystonecpa.com/
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Hey everybody, welcome to another episode of the remote real estate investor. I'm Michael album and today I'm joined by my co host, Tom Schneider, and two very special guests, Amanda Han and Matt McFarland, two very distinguished notable authors, CPAs, tax experts and real estate investors. And in today's weekend wisdom, they're going to be talking to us about the owner occupant sales exclusion, that can really boost real estate investors gains. So let's get into it.
So one thing I want to make sure that we highlight for for listeners, and a question that I want to ask too, is about the owner occupant sales exclusion. Can you talk to us a little bit about what that is? And how folks might be able to utilize it?
Yeah, it is actually a great strategy. And, you know, again, why don't we use the word incentives that they provide people out there in the tax world, essentially, homeowners, if they own and use a house for at least two out of the previous five years, and they go and sell the property, they a single person can get up to $250,000 of gain tax free married couples, $500,000.
So that's just by itself, you know, if you're a homeowner, you're not even, you know, investing in rental properties. And that's great. If you're looking to sell your property, and you, you know, lived in the last five years, you've got some game, you know, good chances are, you know, a good chunk of if not all of it can be totally tax free.
Now, the cool thing is, we've actually seen this coupled for real estate investors. So and you know, and a good example would be somebody lives in a house for two years, they move out for whatever reasons, but they don't sell it right away, they rent it out for up to three years. So let's say they sell it right before the end of the year five, they say if they're looking back, they meet the two out of five rule, they can actually still exclude the 250 or $500,000. Again, even though it's been a rental property at the time of sale. So that's we've seen clients take advantage of that. Now, if you will, you know, you want to totally supercharge it, we've seen clients take advantage of that. And then also, maybe their gain is more than the 250 or 500, then they do a 1031 exchange to defer the rest of the gain because they're selling a rental property and buying another rental property, you know, so there's a lot of different ways that you can use it to your benefit.
So question for you both if I if we want to string a couple of these concepts and tactics together, could I buy a owner occupant house live in it for two to five years, rent it out for just under three years, then when I go to sell it for a gain of more than 500,000? Maybe called 750? I do a 1031 exchange and get the owner occupant exclusion so that I get that 500 tax free. And then I can 1031, the additional 250 on top of that, go buy an investment property and then have it be an investment property for a little bit and then do a refinance to an owner occupant primary mortgage. Is that possible?
Yeah. So on the front end, they're selling your property, there's a primary they're gonna, you know, probably pay some taxes, whatever the exit the gain, it was an excess of 500. Yeah, what you do with the money doesn't matter with respect to those rules. So you can still utilize exclusion if you're buying an investment property on the on the back end. But yeah, you can always buy an investment property and change it into a primary, but there's definitely things you want to be aware of. And there's things you can do with a 1031 exchange, if you're selling a rental buying another rental, and then you move into that rental later on, then you can do that. But I think that the key is you want to give it enough time as a rental property that if it ever got question is not that, hey, my intention all along was to move into it for four months, you know,
Yeah, there's always facts and circumstances that come into play. So we actually had a client who did a 1031 exchange, a very large transaction, he bought a rental property, but because of fires where he was living at the time that volcanoes erupted in Hawaii, he decided to move. And you know, the best placement to move into was that replacement property for the 1031 exchange. So he ended up doing it. But you know, that's a kind of an extreme scenario where we thought, well, you can clearly demonstrate a change in facts where, you know, it was supposed to be a rental, but he moved into it shortly after it because of the location and things like that.
But the key like Matt, what Matt was saying, the key is at the time of the exchange, your replacement property should be a rental, or at least the intention of it should be that it's going to be a rental, that you move in thereafter. You know, that's not that big of a deal.
So what you're saying is that you should get your tax professional involved on the front end and not after the fact and tell them Oh, hey, by the way, I sold this property
Ahead of time!
Proactive, not reactive,
We had a client who use that, you know, primary home exclusion rule, not as rentals, but just as primary home. They just use that over and over again, you know, so they move into a house, they do full rehab, they live in there for a couple years, they sell it, you know, 500,000 tax free gain and move into another house and do that whole thing again. And so you know, that's a strategy to you know, that's you know, if you're not really looking to to rent it out, but just continue to get that tax free gain, that's also a possibility
as long as you like moving and rehabbing properties and you can totally take advantage of that.
Exactly. If you have spouses or kids they have to be okay living in for two years.
Yeah, that's a pretty amazing strategy. I mean, if you just think about the pure math behind that every two years, you could be generating an additional $500,000 in tax free gains that that's a million bucks every four years. It's pretty unbelievable.
Yeah, for sure.
Yeah. Exactly. of waiting federal and state taxes, right. I mean, that could be as high as 40%.
Hey everybody that was our show. Thanks so much again to Matt and Amanda. So such a such a pleasure having you both on looking forward to doing it again soon. If you liked this episode, please please feel free to leave us a rating review and subscribe wherever you listen to your podcasts. And if you have any comments or ideas for episodes that you'd like to hear, please leave those in the link tree in the show notes of this episode. Thanks so much for listening and happy investing.