Flipping a House That Is Your Primary Residence

Picture of Flipping House as Primary Residence
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Buying houses in need of repairs or renovations and then selling them is typically referred to as "flipping houses." As an investment strategy, it is rarely done with houses where the investor actually resides, but that can be a viable approach. Like anything, there are great aspects to this type of strategy, and there are challenges that need to be considered.

Pros

  • Making only one mortgage payment

  • Avoiding capital gains tax

  • Not needing to rush to maximize profits

  • Reducing expenses with sweat equity

Cons

  • Waiting two years to avoid a capital gains tax

  • Living in a construction zone

  • Causing new renovations to have a lived-in look

  • Needing to move again when renovations are complete

Pros

There are several benefits to flipping a home that you are living in.

  • One mortgage and avoid carrying costs: Typically, when you purchase real estate as an investment, you are purchasing a property in addition to the property you already live in. In this traditional home flip, you would be responsible for paying all the carrying costs of the property. Assuming you need financing for the property, these carrying costs include monthly mortgage payments, property taxes, insurance, utilities, property maintenance, Realtor commissions, and closing costs. You have these expenses on the property flip and also are responsible for paying these same bills on your primary residence. If you decide to live in a home you are trying to flip, you only have to worry about one set of expenses.
  • Section 121 exclusion: You can avoid paying capital gains tax if you live in the property for at least two of the last five years after you have purchased the property. When you sell your home, you can avoid paying taxes on $250,000 of capital gains if you are filing as an individual or $500,000 of capital gains if you are married and filing jointly.
  • Less pressure to sell quickly: In a traditional property flip, the goal is to purchase, renovate, and sell quickly. In this scenario, it can be very stressful when you cannot find a buyer because you still are responsible for paying the mortgage and other expenses on the property. If you are living in the home you are trying to flip, you do not have these secondary expenses to consider. The lengthier timeline also can allow you to look for bargains on the renovation materials and contractor pricing. Contractors may have a slow season, so they will be more willing to give you a better price if you can get the work done at that time. Since there is no time crunch, you also have time to shop around to get the best price for materials.
  • Sweat equity: You may be able to further increase your profit potential by doing some of the work yourself instead of hiring others to do it. You will need to consult with your local municipality to determine which projects you are legally allowed to take on yourself and which projects need to be completed by a licensed professional. Some local governments allow homeowners to do work such as electrical and plumbing, and others allow this work to be done only by a licensed professional. Even if you complete the work yourself, you likely will have to pay a certain fee and take out a permit. Permit regulations vary based on local and state building codes. For example, some cities will require you to take out a permit to put up a fence around your property, while others will not.

Cons

There are several downsides to consider when flipping your primary residence.

  • Must wait at least two years to sell: One major downside of living in a home you are attempting to flip is having to wait at least two years from the date you have purchased the property to sell it. If you sell the property before you have lived in it as your primary residence for two years, you will have to pay taxes on any capital gains you have made on the property. The real estate market can change very quickly. Being unable to put the home up for sale when the real estate market is hot can cost you big. In real estate, even waiting a couple of months could be the difference in tens of thousands of dollars in potential profit.
  • Living through the renovation: Another negative to be aware of is you will be living in a construction zone, and it can become very stressful. Having contractors in your personal living space can get old very quickly. You may have to deal with issues such as not having working toilets or showers, having to move out of the home for a week while the floors get sanded and stained and fighting with contractors or suppliers when a job is not being done correctly, taking too long, or the wrong materials were delivered.
  • Can damage the house: When you are living in the property and trying to flip it for profit, you risk damaging the renovations you have done. Freshly painted walls can quickly get dirty, marble counters can start to etch, and cabinet doors could stop closing correctly. If you have pets, you may start to see claw marks on your newly finished hardwood floors.
  • Start to design for yourself: When you are renovating a flip, you want to appeal to the masses. One potential problem of living in a flip is that you may start to design the home for yourself, and your style may not appeal to everyone. You also could be more likely to overspend because you will be using that kitchen or bathroom until the home is sold. You may want the more expensive Calacatta marble over Carrara marble, while the end user might not know the difference.
  • Put off the work: Living in a home you are renovating can lead you to put off doing the actual work. Knowing you cannot sell the home for at least two years can cause you to kick the can down the road. You then can find yourself in a crunch trying to complete multiple projects weeks before putting the property up for sale.
  • You have to move: Assuming you can sell the property, you will have to find somewhere else to live. Moving is stressful, and it can be even more stressful if you are trying to find another great deal on a home and do another primary residence flip.
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