When I'm not hosting this podcast, I am writing books, but it is really hard for me to write when I'm at home, so I like to find remote cabins in the middle of nowhere to just hang out and write. But I hate the idea of my house just sitting empty, doing nothing but collecting dust and definitely not collecting checks. And that's why I'm an Airbnb host. It's one of my all-time favorite side hustles. Other popular side hustles are awesome, too, don't get me wrong, but they often involve big startup costs. By hosting your space, you're monetizing what you already have access to. It It doesn't get easier than that. And if you're new to the side hustle game and you're anxious about getting started, don't worry, because you're not in this alone. Airbnb makes it super easy to host. I mean, if I could do it, you could do it. And your home might be worth a lot more than you think. Find out how much at airbnb. Com/host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. If you're selling a house, you have an opportunity to have an amazing payday.

Except those gains could be erased by taxes. But I have good news. There are perfectly legal loopholes to avoid getting hit with a big tax bill. Which loophole you use depends on whether you're selling your house or an investment property. To help you cover all of your bases, I want to walk you through both. But first, let's talk about personal homes. If you sell your home for more than you bought it for, you'll need to pay capital gains taxes. There are two Two types of capital gains taxes: short term and long term. Short term capital gains apply when you sell an investment before a year is up. Today, the rate is the same as ordinary income tax. If you're already a high income earner, and if you're not, you will be soon, that ordinary income tax rate adds up to a lot. The top federal tax rate right now is 37%, which could be a big blow to the profit from the sale of your house. Long term capital gains, on the other hand, are taxes you pay on investments you hang on to for a year or longer. The tax rate for those gains is much lower than short term capital gains.

They are 20 % for the highest earners and zero % for the lowest earners. So if we have to pay capital gains taxes, we want to pay long term capital gains taxes. But there's another layer to this when we're talking about real estate. So to recap, if the property you're selling has been your primary residence for less than a year and you sell it, you'll be hit with short term capital gains taxes. Boo. If you've lived in the house for a long longer than one year, but less than two, then you have long term capital gains taxes. Better than short term cap gains, but still not the best. The best case scenario is actually when you've lived in the house for at least two of the last five years. And no, those two years don't have to be consecutive. If that's the case, then you don't have to pay capital gains tax on the first $250,000 of profit from the sale of your house if you're single, or if you're married, you don't have to pay capital gains tax on the first 500K of the profit of your sale. If you made more than that, well, first of all, congrats.

Second of all, you do have to pay long term capital gains taxes on all the remaining profit. But still long term capital gains taxes is not that bad. So let's put your residents aside for a sec. And imagine we're talking about an investment property. Similarly to selling a residential home, if you sell an investment property for a profit, you're going to be hit with cap gains taxes on what you earn. But you can't use the argument that you've lived in an investment property for two of the last five years because, well, it's an investment property, and by nature, it's not your primary residence. That is where a 1031 exchange comes in. A 1031 exchange does not sound sexy, I will not lie. But do not let this name fool you. It is another beautiful tax loop poll that saves you from a big tax bill. And honestly, what is sexier than that? I'll wait. Like the name suggests, this money move is an exchange, where instead of selling an investment property for cash, you essentially exchange it for a new property of equal or greater value. This move saves you from having to pay capital gains taxes on the cash that you make from the sale because after the sale, you are not left with cash.

You are left with a new and improved property. Pro real estate investors will keep doing this and doing this over and over again exchanging properties until they're in a lower tax bracket or when tax laws are more favorable, and then perhaps they'll sell that property for cash. This is a great move for real estate investors because, like I said a zillion times so far today, if a real estate investor just sells their property Well, right, they would owe up to 20 % in cap gains taxes on that profit. But by skipping that tax bill, you get more money to reinvest than you would have had without doing the exchange. But unfortunately, you can't just use this loophole to get yourself a dope new home. To use this hack, we have to be talking about three things. Number one, investment properties only. Both the house you're selling and the house you're buying must be for investment or business use, not a personal home. Number two, the right timeline. You need to complete the exchange within 180 days of selling the original property, so you can't be sluggish on this. Number three, the exchange has to be direct without cash or non-like property involved.

Let's double click on this one. You might be wondering what it actually looks like to exchange one property for another and not pay in cash. If you're buying a new investment property from seller Bob, you can't just say, Hey, thanks, Bob. I'm going to buy your property and give you zero dollars. But you can have the property that I'm selling if you want it. Yeah, that doesn't work. Of course, the seller does need to get paid for the property that you're buying. So what you do is when you sell the property that you're exchanging, the money from that sale needs to go into a third-party escrow account. That money cannot pass go It cannot pass through your bank account, or this whole loophole falls apart. The rules are really strict here, but if you can check those three boxes, you can essentially give yourself a bigger budget to invest in real estate because you can take what you would have needed to put aside for your Cap Gains bill and reinvest that into your new, bigger, better property. And now might be a good time to look around, according to the chief economist at Zillow.

Here's what she had to say about it.

There is a major fundamental shift in housing from pre-pandemic to now, right? And a lot of ways to think about the why of that is that low mortgage rates really caused insensational demand, and we harvested inventory down to such low levels, it's really hard to imagine where all that new supply would come from because buyers would also be ready, remember, if mortgage rates came back up, to actually return inventory up. Inventory is just like the pool of homes that are available at one time. So inventory remains very low, meaning on net, housing is more competitive than it used to be. That's why homes are still selling at 13 days, and we expect 10 moving forward. Pre-pandemic, you would have a couple of weeks. You'd be able to make more of that decision. So that means on net, prices are still coming in above that list price more often than pre-pandemic.

For today's tip, you can take straight to the bank. If you do attend 31 exchange, you're going to need to pay really close attention to which closing costs you can use exchange funds to cover. The IRS says you can pay for closing costs from the exchange fund, so long as those closing costs are normal transactions. Transaction costs. This is in contrast to non-exchange expenses. And what is a normal transaction cost versus a non-exchange expense is not super intuitive. So for example, title insurance fees can be paid from exchange funds, but property liability insurance cannot. So when it comes to 1031 exchanges, you're going to need to read the fine print in order to read the rewards. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan LaVoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your moneyquestions, moneyrehab@moneynewsnetwork. Com, to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.