How to Turn Land into Gold
By Graham Summers
January 10, 2007
Want to make $500,000 every five years, free and clear? Tie the knot.
If you’re married, you can bring home half a million dollars, tax free, by investing in land. Nashville real estate guru Pat McAlister explains...
“Prior to 1997, capital gains exemptions on the sale of a primary residence were a one-time deal available only to individuals 55 or older. The one exception to this rule was if you rolled the profits from your home’s sale into another, more expensive residence. You could do that as many times as you wanted, and the money your rolled over was tax-free.
“We used to call it the builder’s retirement fund. A builder would build a home on some prime real estate, live there for a couple of years, and then sell it for a profit. He’d then roll his profits into another, bigger home.
“If the builder knew what he was doing, and built on land that appreciated quickly, after four or five of these types of deals, he’d have enough rollover profit to buy a house outright. So now the builder has no mortgage and a nice place to live. He then simply waits ’til he hits 55, sells that home, and pockets $500,000 capital gains free.”
In 1997, Bill Clinton’s Taxpayer Relief Act made this deal a whole lot easier. You no longer have to be 55. And you can do this every two years, provided you use the home as your primary residence for the full two years.
And if you aren’t anxious to sell, you can use any two years out of a five-year period. So you can live in the house a year, live somewhere else for three years, then come back and live in the original house another year, and still qualify for $500,000 of tax-free profit, so long as you’re married. If you’re single, the limit is $250,000.
The idea is to get people to take their money out of their homes and put it into the economy. But certain land investors use it to make a killing.
“The key is to find land that will appreciate quickly,” Pat continues. “You especially want to find land that a developer would be interested in buying sometime in the near future.
“For instance, let’s say you buy five acres at $5,000 an acre near a major interstate around an edge city. There’s already retail space being built in the area, and property values are just starting to rise a bit. So you buy the land for $25,000 total and then build your house on the property for $120,000. Altogether, your costs are $145,000.
“You then live there for two years or so, during which time more retail space and office property goes up in the surrounding area. You land starts to appreciate in value and developers come knocking.
“You see, those five acres can be split into a bunch of town homes. Higher population density means a higher yield on the land value. So you sell the land, your house included, to a developer for $250,000. You just made $105,000 ($250,000-$145,000) tax-free. Do this a couple of times, and in 10-15 years, you could make $1 million in land, tax-free. You’re turning land into gold.”
I personally am using Pat McAlister’s advice to find land with this kind of potential in Nashville, where I plan to relocate within the next six months. If you’re interested in the area, you can contact Pat at Pat@buildersanalysis.com.
Who knows, we might be neighbors next year.
Good trading,
Graham
