There is a strategy that allows you to conservatively and with minimal risk increase your capital using real estate in the United States. This method is based on buying a house, improving it and then selling it at a profit, while taking advantage of the tax benefits provided for owners of primary residence (primary residence).
The essence of the strategy
You purchase a home that has the potential to increase in value through repairs and improvements. After the purchase, you move into the home and make it your primary residence. For at least two years, you live in that home while you renovate and modernize it. This may include updating the kitchen, bathrooms, improving the landscaping, replacing windows or the roof – any work that will increase the appeal and market value of the property.
Benefits of living in a primary residence
While you live in a home and invest in home improvements, two key processes occur that work to increase your equity.
- First, the repairs and improvements you make directly increase the value of the property. Modern renovations, especially in key areas such as the kitchen and bathrooms, greatly increase the home’s appeal to potential buyers.
- Second, the real estate market in the United States tends to grow over the long term. Over time, especially in developing areas, real estate prices tend to rise. Thus, by the time you sell, your home becomes more expensive due to both your efforts and the natural growth of the market.
Tax benefits of selling a primary residence
After two years of living in your home as a primary residence, you may be eligible to sell it and take advantage of significant tax benefits. In the United States, there is a law that allows you to exempt from capital gains tax a substantial amount of gain from the sale of a primary residence. If you file your tax return as a single person, you may not pay tax on gains up to $250,000. If you are married and filing a joint return, that amount increases to $500,000. This means that profits up to these amounts are completely exempt from federal tax, making this strategy particularly attractive.
The cyclicality and repeatability of the strategy
Once you sell your home and make a tax-free profit, you can repeat the process. You can buy a new home that needs improvements, make it your primary residence again, live in it for two years making repairs and improvements, and then sell it, again taking advantage of the tax benefits. In this way, you can create a sort of cycle, repeating this strategy every two years and steadily increasing your equity.
Stability and reliability of real estate investments
Real estate investments have traditionally been considered one of the most stable and reliable investments. Unlike the stock market or cryptocurrencies, real estate is a tangible asset that is less susceptible to volatility and sharp price fluctuations. A strategy based on buying, improving and selling primary residences is particularly conservative because it combines the reliability of the real estate market with the tax advantages provided by the government.
It is not a way to get rich quick, but it is a proven and stable way to build capital with minimal risk and significant tax benefits.
Important Aspects and Cautions
It is important to note that for this strategy to be successful, real estate selection must be done carefully. You should choose homes in neighborhoods with good price appreciation potential, and you should also consider the cost and extent of repairs needed.
It is also important to properly execute all documents and comply with tax laws in order to take full advantage of tax benefits. Consulting with a tax professional and a Realtor can be extremely helpful at every step of this strategy.
