Chris Prefontaine explains how to help sellers avoid capital gains taxes using the 2-of-5-year primary residence rule and the $250,000/$500,000 exclusion. He walks through subject-to financing to stop the clock on the exclusion, lease-purchase bridges, and when to transfer the deed to reset the timeline.
Chapters
How can you help someone who's in a primary residence, they're looking to sell, but they've already left the house for a few years? Why do I even bring that up? This raises the capital gains issue. This raises the issue of if they're in their primary residence for 2 of the last 5 years. So any lookback, if they're in it for 2 of the last 5 years, they can have that one-time exclusion where if I or you sell your home and you file your taxes by yourself, not jointly, you have a $250,000 exclusion that you don't get taxed on. $250,000 from your basis to what you sell at. If you're filing jointly, $500,000. But what some people don't realize, or they wait too long to ask someone like us doing creative real estate how to help them, is A seller, let's say, moved out of their home. There's a bunch of different scenarios, but I'm going to give you one that came out of our community this week as we coach people through this. And it was the seller left their home 2 years ago. So what happened? They were in it for the— in a 5-year lookback, they were in it for 2, they left at 2. They got one more window of 12 months that they've got to sell that home or they're going to get whacked on capital gains and lose that exclusion. So in other words, if they stay out of that home another 18 months and then sell, they're not going to have that exclusion as a primary residence. I'm being very basic. I'm not an accountant. I'm not a tax expert. Being very basic so you can understand the concept here and how creative real estate solves challenges all the time. This is just one of thousands. So what I said to this particular student was Wendy. What I said to Wendy was, I said, here's what you want to explain to your seller. You can purchase that home subject to the existing financing. That means, if you're new to that concept, the loan's going to stay in the seller's name. You're going to buy the house. Why is that important? In the next 12 months, if you do that, it doesn't matter that they have a loan. If you do that, it stops the clock ticking and they solve their issue with capital gains. Now, if you buy the home sub-2 and they have equity, presumably, You're not gonna pay it off right away in most cases. We don't do that. You're gonna have some terms that go out further, but as long as that deed transfers, it stops the clock from ticking. Now, what if someone says to you, well, and this is normal, well, I just met you. How do I know you're gonna pay my mortgage? That's risky for me. All right, Mr. and Mrs. Seller, why don't we do this? We got 1 year left. Why don't we structure a 1-year lease purchase contract? Now that's aggressive for you to find a buyer to cash that out. I'm not saying they're not out there, but for you to find a buyer to cash that out in 12 months, it's super aggressive. So you say to them, the chance of me finding a rent-to-own buyer, getting them mortgage ready, and getting all that done inside of 12 months is pushing the envelope. You be honest with them. You say, I'm concerned, I'm a conservative investor, but what I can do is I can go after that. There are a lot of people coming out of COVID who left their job and they're going into the entrepreneurial world, and some of those have been at it for a while, and they might be a valid route for us to get a buyer in here quickly. And sometimes, quite frankly, you might luck out and get someone that's a 6-month window. We've done it. If it doesn't work, Mr. and Mrs. Seller, at the 11th month, literally before your 12-month ticker is up, we can then transfer the property sub to existing financing. The difference being I have 11 months to work with you and prove to you that we do what we say we're going to do. We're going to pay your mortgage every month. We're going to get to know each other a little bit better. And that's how you get that done. So you have a technique where you can buy it right away, or you have a technique where you can do a sandwich lease and then pivot to a sub-2, which is a great strategy. We do it a lot, not just on this capital gains issue. So know this, if that was in any shape, form, or fashion confusing, know that if someone's up against capital gains You can help them, okay? If the window's— if the clock's ticking. If you want to get more scripts around that, come hang out with us this Thursday on the Wicked Smart Sit Down. It's every Thursday. It's at 4 PM Eastern Standard Time on Zoom, and you can bring any and all questions. Nothing is off limits. On occasion, we'll throw a speaker in there. Most of the time it's live Q&A, and we welcome you coming. If nothing else, come this week and camp out, see what the Wicked Smart community is about. It's really cool. It's like nothing else you'll experience because we are in the trenches with you getting this stuff done and it won't cost you 10 cents. If you want to— if you're not getting notified regularly, if you're on our list you are. If you're not, just go over to smartrealestatecoach.com/events and you'll see the schedule there for the sit-downs. See you next week on the next Q&A Thursday.
