A serial homeowner can make a financial killing
By Jay MacDonald • Bankrate.com

No, not the grisly made-for-TV variety. Shiner is toying with the idea of living serially in his rental properties for the two years required by the Internal Revenue Service to avoid capital gains tax, then making a tax-free killing when he sells them.

If he does it right, in as little as four years, he and his wife could legally walk away from two of their Mill Valley, Calif., properties with a cool $1 million profit -- absolutely tax-free.

Thanks to the 1997 Taxpayer Relief Act, single homeowners can exclude from capital gains tax up to $250,000 of the profit from selling their principal residence; couples filing jointly can exclude up to $500,000. Exceed those thresholds, and the IRS will tax the excess up to 15 percent.

There are a couple of restrictions. You must have used the property as your primary residence and lived there for an aggregate of at least two of the five years prior to the sale, and you can only take such exclusions once in any two-year period.

For most sellers, those requirements beat the prior law.

Home sale profits, then and now
When the law was changed, homeowners welcomed the rare good news from the IRS. The tax code previously allowed some home-seller breaks, but they weren't nearly as generous.

Under the old law, Shiner would have had to roll his gain into an equal or more expensive property, and that would have only deferred his tax to a later year.

"Actually, my wife and I are looking to downsize in a few years because we have three kids, one in college, one who starts college next year and one who is 10," he says. "We have a five-bedroom house, which doesn't make sense, so we are thinking of buying something smaller."

The previous over-55, once-in-a-lifetime exemption of $125,000 wouldn't have helped the Shiners much either. The home they bought 20 years ago for $157,000 is worth in the neighborhood of $800,000 today.

Now they face the attractive prospect of becoming millionaires before their nest is empty. Their two rental properties are paid off; their home will be shortly.

"We still haven't decided what we're going to do," Shiner admits. "Theoretically, we could move into one of our rentals for a couple of years, sell our primary residence which we would have lived in three and four years ago, keep the half-million from that, then sell the rental property and keep the half-million from that and come up with $1 million clean and be completely within the law. There are a lot of options for us right now."

It's a nice "problem" to have. And it's one that may become widespread as soon as baby boomers with rapidly emptying nests consider becoming serial killers themselves.

Anatomy of a serial killer
"Most people haven't figured this out; they haven't connected the dots," says Tom Lucier, real estate investor and author. "You have an opportunity for tax-free income, it provides you shelter, you don't have to worry about tenants so you eliminate property management and chances of vandalism, and you don't have to pay any taxes. If you buy right, it's risk-free."

Lucier says certain types of homeowners may make the best serial killers:

• Singles
• Married couples with preschool-age children
• Childless couples
• Empty nesters
• Landlords with single-family rental houses

While not everyone is in the enviable position to reap a tax-free half-million on the sale of property, even smaller exclusions can pay big dividends, whether you're a retiree looking to supplement your income or a twenty-something scratching for seed money to invest for the future.

The key, however, is buying the right property. Lucier says serial killers in particular should adhere closely to his landlord maxim: Never buy a property in an area that you wouldn't want to live in yourself. After all, part of the plan is you will eventually live there, at least for two years and quite possibly more.

"Two years is an awfully short window," says Shiner. "There have been two-year slides [in housing prices] almost everywhere, even in Marin County."