House Flipping (with no taxes)!

[wildcat]

If the kitchen layout and the guts of the cabinets are ok, then you can simply remove the doors, refinish the framing and replace the doors and save a lot of $$$. Or if the layout and cabinets are ok, sometime just refinishing the frames, doors and drawers will work at even more savings.

If you start changing the layout, you might be able to reuse the cabinets if they are still in good shape. In our new house, we reused our kitchen cabinets (which were only a few years old) and were able to buy some additional cabinets from the same manufacturer to complete the new layout. Saved us a lot.

Plan to keep the layout.

These cabinets are old. Probably original cabinets from the late 70s. The upper cabinets seem to be in decent shape. Lower cabinets seem to have a lot more wear. The bottom below the sink looks like some water may have damaged 'em a bit over the yrs.

I've thought about just refinishing, painting, etc. but concerned about the bottom cabinets wear. I guess it's possible to just fix the bottoms without tearing it all out?

I've actually considered Ikea as a less expensive alternative. Don't laugh
Ikea's cabinets get decent reviews online from what I've read. This isn't my forever home so I just want it to look good and appeal to buyers.

Open to other suggestions, thanks.

 

[ERD50]

A free place to live? Did somebody just up and give you the house?

I think it's comments like this from the OP that leads to some added skepticism from some posters. It sounds like double-counting, and that maybe makes people wonder about other claims.

I don't know what it means to make a profit on the transaction and 'live for free'? Does it mean the profits more than covered your living expenses? If so, it is irrelevant -the profit could be spent on anything (we got a new car for free!). If you chose to spend it on housing, that's fine, but it does not make it 'free housing'. You still had mortgage payments (or capital tied up), utility bills, taxes, etc.

It's just confusing lingo, that's all.


-ERD50

 

[calmloki]

I know people who flip houses and don't live in them. They have to pay "mortgage payments (or [have] capital tied up), utility bills, taxes, etc." Those are part of the expenses of the flip. The OP has those same expenses but chooses to live in the house they are flipping. OP saying they live there for free sounds pretty accurate to me..

 

[Meadbh]

I've actually considered Ikea as a less expensive alternative. Don't laugh
Ikea's cabinets get decent reviews online from what I've read. This isn't my forever home so I just want it to look good and appeal to buyers.

I won't laugh at all. I have friends who are foodies and gourmet cooks who redesigned and renovated their kitchen into a great room using Ikea cabinets. The result is spectacular. And everything lines up!

 

[Dawg52]

Plan to keep the layout.

These cabinets are old. Probably original cabinets from the late 70s. The upper cabinets seem to be in decent shape. Lower cabinets seem to have a lot more wear. The bottom below the sink looks like some water may have damaged 'em a bit over the yrs.

I've thought about just refinishing, painting, etc. but concerned about the bottom cabinets wear. I guess it's possible to just fix the bottoms without tearing it all out?

I've actually considered Ikea as a less expensive alternative. Don't laugh
Ikea's cabinets get decent reviews online from what I've read. This isn't my forever home so I just want it to look good and appeal to buyers.

Open to other suggestions, thanks.

If you need countertops, something like this is a cost effective way to upgrade. I recently went into my aunt's old house I sold and the lady put in a similar product that looked great. An old neighborhood that doesn't require granite. Amazing how much better the house looks. She even put in crown molding in a couple of rooms. Nothing too expensive, but certainly sets the rooms off.

Shop BELANGER Fine Laminate Countertops 4-ft Labrador Granite Laminate Countertop at Lowes.com

 

[ERD50]

I know people who flip houses and don't live in them. They have to pay "mortgage payments (or [have] capital tied up), utility bills, taxes, etc." Those are part of the expenses of the flip. The OP has those same expenses but chooses to live in the house they are flipping. OP saying they live there for free sounds pretty accurate to me..

I'm not following your accounting.

When I sell my primary residence, I will need to calculate my capital gain. Utility bills and taxes are not part of the capital gain. They are living expenses, not expenses of the flip.

If someone is not living in the house, then it doesn't count as a primary residence, so it is kinda outside this discussion. But does that mean that I am 'living in my house for free', because I'm not paying rent/mortgage to live in another house? That doesn't make sense to me.

-ERD50

 

[ERD50]

Hypothetical to make this clearer (hopefully). Ignore tax laws etc, for simplicity:

Say I live in a house for 5 years, and my housing expenses are $10,000/year.

After 5 years, I sell my house, and net $50,000.

I could say I 'lived in my house for free' if I want, but then I can't also say that I 'made $50,000 net'. That would be double counting, no?

-ERD50

 

[calmloki]

"If someone is not living in the house, then it doesn't count as a primary residence, so it is kinda outside this discussion. But does that mean that I am 'living in my house for free', because I'm not paying rent/mortgage to live in another house? That doesn't make sense to me".

Let me try again. Two flips. One gets lived in, the other doesn't. Same expenses. Both sell for the same price. Looks to me like the one that is lived in is lived in for free.

If you want to get picky,the un-lived in flip gets to sale time and writes off utility and insurance etc. as expenses against the at-sale profit the flipper pays tax on. The owner of the lived in house, as a primary residence and flip, doesn't worry about writing those expenses as any gain is taxfree if flipped within 2 years. Same expenses, tax free expenses in both cases, difference is the OP lived there and makes a tax-free gain vs. the non-resident flipper..

 

[Katsmeow]

Hypothetical to make this clearer (hopefully). Ignore tax laws etc, for simplicity:

Say I live in a house for 5 years, and my housing expenses are $10,000/year.

After 5 years, I sell my house, and net $50,000.

I could say I 'lived in my house for free' if I want, but then I can't also say that I 'made $50,000 net'. That would be double counting, no?

-ERD50

I don't think so. Imagine that you already had a house you liked so you were living in it but then you found a flip house and you buy it and sell it and net $50,000. You net the same $50,000 whether you lived in the house or not. So, if you live in the house instead of living somewhere else I think it is fair to say that you are living in it for free.

 

[pb4uski]

I agree with ERD50 on this one. The profit is a +50 and the living costs are -50 so the net cash is zero. So any profit - living costs needs to sum to 0.

I think most properly it is that one had a profit of 50 and 50 of living costs. But if you want to think of it as 0 profit and 0 living costs, then go for it.

But you can't claim to have a profit of 50 and 0 living costs because to do so would be counting the profit twice. Profit - living costs must equal zero.

 

[golftrek]

OP here on my statement that I made $100,000 on the flip and also lived in the house for "free"--here is how I look at it.

I bought a foreclosure for 250,000 cash. I moved in. I did have some expenses--utilities, insurance, taxes, but I would have had some of those expenses even if I had rented a place. Maybe on the house my expenses were a couple thousand more per year than if I had rented a place, but if I had rented I would have been also paying rent.

I could have taken the $250,000 and invested in the stock market. Maybe I could have made $100,000 in 2 years in the stock market (and maybe I could have lost a lot of it too), but in any event if I had invested the $250,000 in the stock market I still would have had to live somewhere.

I am renting now so I know how much it costs to rent where I live. To rent a house comparable to the one I flipped the rent would be around $2500 per month, plus I would have to pay utilities and rental insurance. For 2 years to rent a comparable place would be $60,000.

So to compare apples to apples, if I had invested my $250,000 in the stock market, I would really need to make $160,000 over the 2 year period to cover my gain on the house and pay my rent. That is around a 30% return per year. BUT the gain on the house was tax free. My stock market gains would be subject to capital gains of at least 20% (federal and state) so that bumps up the return I need on the stock market to 50% per year. I have never done that good in the market.

To be fair, I should also factor in our time. On this last house we worked
really hard for the first 3 months and got all the renovations done. We worked pretty much full time for those 3 months. So say for the 2 of us we put in 40 hours each for 12 weeks, a total of 960 hours. Maybe we could have gotten some kind of temporary 3 month job earning $20 per hour and made about $20,000 BUT we would have had to pay income taxes and FICA, etc. So maybe we could have netted $10,000. So maybe what I need to earn on the stock market over the 2 years should only $150,000. That kind of return on my $250,000 stock market investment is VERY unlikely.

So now you see why I think I made $100,000 and lived for "free." I will admit that this flip probably cannot be duplicated. We were in the right place at the right time. But we have flipped a lot of houses and made very good profits every time and lived for "free".

This way of living is not for everyone--but it is the way we live and make money. We have nice IRAs and pensions and Social Security that we will live on someday but for now we live on our tax free "flip" money.

Jo Ann

PS Our family and friends can't believe we are able to do this either, but they see the results.

 

[wmc1000]

I applaud Golftrek for what they have done. Their creative approach provides shelter for them and they get a significant return on their capital investment every couple of years!

 

[wmc1000]

As for keeping kitchen remodels cost -effective I re-did my daughters kitchen 18 months ago by resurfacing her laminate coutertops with new Wilsonart High definition laminate and they look superb. Less than $500 to do the entire kitchen.

 

[Meadbh]

The fact that you worked really hard on the renovations for the first three months and then enjoyed the house for the remainder of your time there makes it seem a bit more bearable. What would be really awful (to me) would be to live in a construction site on an ongoing basis.

But how did you put in all those hours while still working? Did you take time off work to do the renos? And if so, what was the opportunity cost?

 

[pb4uski]

Your real living costs were the opportunity cost on the $250k cash you invested in the house plus the direct expenses you incurred (taxes, insurance utilities, etc). For discussion sake, let's say your investment opportunity cost of the $250k was $50k for the two years and your expenses were ~$8k a year or $16k for the 2 years.

So to me, you made $100k profit on the flip and had $66k of living costs. If you want to claim that you lived "free" then your profit on the flip was only $34k.

It is disingenuous to claim to have made $100k on the flip AND lived for "free".

BTW, I think what you are doing is novel and am glad it works for you and can see where it may appeal to others. My only objection is to the way you are portraying it as both profiting AND living for free.

 

[aja8888]

The only way you can live for free is to move into your car and don't drive it (as long as it's paid for).

 

[golftrek]

Meadbh

We are retired, no jobs. No way would could have done all the work in 3 months if we were not retired. Once we got all the work done we took off in our motorhome.

Jo Ann

 

[Katsmeow]

I agree with ERD50 on this one. The profit is a +50 and the living costs are -50 so the net cash is zero. So any profit - living costs needs to sum to 0.

I think most properly it is that one had a profit of 50 and 50 of living costs. But if you want to think of it as 0 profit and 0 living costs, then go for it.

But you can't claim to have a profit of 50 and 0 living costs because to do so would be counting the profit twice. Profit - living costs must equal zero.

I understand this argument but it seems to say living in the house while flipping it for $50k is no different financially than not living in the house while flipping it for $50k. That is obviously not true.

Situation 1 - Let's say you are spending $50k to live in your own house. During the time you spend that $50k, you are retired. So at the end of, say, 2 years you now have -$50k from where you started (i.e. the $50k you spend on living expenses during the 2 years).

Situation 2 - Still spending $50k to live in your house, but during that 2 years you flip a house and net $50k. At the end of the 2 years you are exactly where you started. You are $50k better off than in Situation 1.

Situation 3 - You flip the same house making $50k net, but this time you live in it and your living expenses are, say, $10k. At the end of the year years. You are $90k better than in Situation 1.

So, it is clear that living in the house does in fact better your financial situation over not living in the house. Situation 3 is financially much better for you than Situation 2 even though you are netting the same amount from flipping the house itself in either situation.

 

[ERD50]

....
So now you see why I think I made $100,000 and lived for "free." ...

No, I don't. You are still double-counting.

You netted $100,000 tax free with some sweat equity, and that's great if that's what you want to do. But if you netted $100,000, you still had property taxes, utilities, etc. So to pay those and net $100,000 you would have had to make $100,000 plus those expenses.

Trying to say that you would have spent that in addition if you lived in another house while you rehab'd is a whole different case, as you can't get this tax free unless it is your primary residence.

Try looking at it this way to break this double counting logjam - let's say the real estate market went south on you, and you sold it for $0 gain, you just broke even. You are trying to tell me that your checkbook is just fine, you didn't spend anything out-of-pocket for taxes, insurance and utilities? That doesn't make sense, of course you had to pay for those things. And if you had a $100,000 gain, you had to pay for those things - they are separate from the gain.

Your real living costs were the opportunity cost on the $250k cash you invested in the house plus the direct expenses you incurred (taxes, insurance utilities, etc). For discussion sake, let's say your investment opportunity cost of the $250k was $50k for the two years and your expenses were ~$8k a year or $16k for the 2 years.

So to me, you made $100k profit on the flip and had $66k of living costs. If you want to claim that you lived "free" then your profit on the flip was only $34k.

It is disingenuous to claim to have made $100k on the flip AND lived for "free".

BTW, I think what you are doing is novel and am glad it works for you and can see where it may appeal to others. My only objection is to the way you are portraying it as both profiting AND living for free.

Exactly.

PS - I'll answer Katsmeow's post a bit later....

-ERD50

 

[ERD50]

Katsmeow:

Certainly, owning one house is less expensive than owning two houses (all else being equal). But (ignoring tax consequences for now), living in the rehab doesn't make your housing expense 'go away'.

You have a net gain/loss, and you have a living expense. That is all there is.

If you don't live in the rehab, you have two (of some) living expenses. So you obviously save money by living in the rehab, rather than living in another home (again - ignoring all the tax issues). But again, that doesn't make the living expense 'go away', it is there, you pay the bills each month, it is a real expense separate from the net gain/loss of the eventual sale.

Like my $0 gain example in the previous post - the living expenses are still there, you paid them. You don't pay for things that are free, by definition.

It's fine to say we saved money by living in the rehab rather than living in a separate home that is not under construction. But saying that you 'lived for free' would be like saying I got my car fixed 'for free' because I got it fixed rather than buying a new one. No, it was a savings compared to buying new, I still had to pay for the repair - it was not 'free'.

heh-heh, if the OP really says they are living 'for free', then that living costs need to be claimed on their taxes as income. The same way as benefits from my employer are taxed.

-ERD50

 

[Elbata]

Hi Jo Ann. I haven't gone through all the comments but I couldn't believe all the negativity either.

I've always have been relatively poor and when I bought my first property (in a very bad area, but inexpensive), my rental neighbor said she would never own, for when her oven breaks, all she has to do is call the manager.

That was 20 years ago and the rent was $1K/mo. So while she's still renting, I'm now living in an expensive home all paid for and never need to work the rest of my life. My monies were made from RE and index investing.

I like the idea of moving every 2 years and learning new construction skills. Hell, I'd rent out one of the rooms at a discount and have a tradesman help with the rebuilding.

Besides a Roth, this is the best thing going.

 

[Gumby]

I've got my pin all ready to go. Now I'm looking for the dancing angels. I'm sure I'll learn something really useful.

 

[Chuckanut]

The reason OP did so well was because they knew which house to buy, worked hard to fix it up, and probably kept their moving expenses low. All are worthy of praise. Had they bought an over priced home at the peak of the bubble, this discussion would not be happening.

 

[zedd]

IMHO the only mistake the OP made was living in a state that taxes income. While renovating the flip they could have also been doing tIRA to ROTH conversions and avoiding the 5% state income tax on the conversion.
Think about it. Have motorhome will travel

 

[zedd]

Maybe this has been raised elsewhere in the thread but if you include opportunity cost in the calculation, which is right and proper to do, then to be fair you need to also include cost avoidance of the imputed rent on the other side of the ledger.


Consider the situation where the flipper only broke even financially on the deal. They may have actually come out ahead once factoring in the avoided rent expense.


So would that mean then that they lived in the house for free? Look at this this way. Consider all those ¾ ton pickups on the highway with business insignia painted on the side, yet they're pulling a trailer with four-wheelers, a toy hauler or a boat. Is that small business owner excluding the operating expenses of that trip from his/her business ledger? Of course he/she is (not.) Does that person think that using a business asset for personal use and being able to write off the cost means that it's free?


They probably do. So how is than any different than the OP feeling that after consuming a “business” asset (by living in the house) and realizing real economic benefit, that they used the asset for free?


I'm in no way meaning to imply that I'm questioning the ethics of the OP. In my mind they are doing what's right in both the letter and spirit of the law. But I do think that saying the use of the house was “free” is a bit of a stretch.