From this week’s Surreal Estate column in the Chronicle,

The woman told me that every two years they bought a new house, moved in, fixed it up — and then sold it. It was a living. And with some handy skills like carpentry, gardening and simple accounting hitched to a hot real estate market, no doubt it was a very good living at that.

What made their itinerant homeownership so profitable was that their work was entirely sheltered from income taxes. If they played their cards right, they could make up to $500,000 tax free, every two years.

How? Because this couple was brilliantly exploiting the wickedly profitable (not to mention marriage-centric) IRS code known as the capital-gains homeowner exemption — a law that allows a homeowners to exempt up to $250,000 (and $500,000 for married couples) in capital gains from the sale of their primary residence.

Of course, profits margins that high might be unattainable. But according to this woman, flipping homes like cheap burgers was a much better bet than regular work, which might have thrown them into a 30- or 40-percent tax bracket. In a word, they were professionals — professional homeowners.

She goes on to ask if this is ‘fair’…

Is it fair? I certainly applaud the idea of allowing people not to be penalized when they move or retire. After all, people have to live somewhere and most often these “profits” simply need to be are poured back into the homeowner’s new residence.

But do we really want to sanction a profession like “real estate flipper” as untaxable just because flippers can leverage the homeowner exemption over and over? I don’t think so.

If we do want to provide that kind of tax break, why not give the privilege to professions that benefit society as a whole — nurses or public school teachers or scientists working to cure malaria?

To me what’s not fair to society was Proposition 13 (the law that fixes property taxes on a property until resale). Sure, it helps quite a few people who wouldn’t be able to keep their homes if they were taxed at current values, but just think about how well-funded our schools would be and how smooth our roads would drive if those well-heeled folks who bought a home in 1998 for $500k (and are paying roughly $5000/year in property taxes) were now paying tax on the current $1.5M value of the home…

Keep the capital gains deduction, scrap Prop. 13 (with exemptions for the truly needy)… That’s my $0.02.

California Proposition 13 [Wikipedia]
Capital Gains Tax [Wikipedia]

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