The Best Fixer-Upper--Part VI: Avoid IRS Shakedown

Tax-free Profit should be a key motive for buying a fix-up home. The 1997 Tax Act opened up a new tax-free option for buyers of fixer-upper homes.

Thanks to IRS code 121, if you buy and occupy your principle residence at least 2 of the 5 years before its sale, up to $250,000 (up to $500,000 for a married couple) of net profits will be completely tax free. You can use this tax break every 24 months, without limits.

A tax break alternative for investors is to make tax-deferred exchanges for fix up houses. IRS Code 1031 says a property can qualify for a tax deferred trade for another fixer-upper of greater or equal cost. Taxes are deferred to a future date, as long as the rules of the property exchange are followed. There is no minimum holding period and a number of property types can be purchased to defer the taxable gain.