VA loan access

[Guest Rat_Race_Hater(ImAnEagle)]

howdy,

 

I am curious...I am a veteran and I want to use my VA loan so I dont have to put so much down on a home. My FICO score is terrible along with my employment history. I am wondering if I will get shot down if I try and apply for the actual loan with such a terrible credit history and unstable employment history up to now. My plan would be to purchase a relatively inexpensive home and live in it for a year...then I want to lease option it out for 5 years so I can capture monthly cashflow,capital gains tax relief, front end and back end profits, and a bit of experience in the home buying process. If I live in the home for 2 years I can roll the profits into a 1031 exchange but Im sure I can still do that if it is under option for the 2nd year and I have only lived in it for 1 year(2 years required to live in home for 1031 exchange qualification) Though this might be a way for me to secure a working capital to help in future investment portfolio building. I would appreciate any assistance on this subject.

 

RRH

[Andrew Ikeda 0]

Hello RRH,

 

I'd be interested in hearing what you find out about VA loans.

I have a borrower who wants to do the same thing.

 

Several people have told me that with VA loans there are some drawbacks:

 

*Mortgage Insurance will be required

*Government fee's will be higher

*Tons of government redtape to meet the lending guidelines and criteria

 

Not sure about the first two but I hope to have an answer soon. Again, please keep me (us) posted on your findings, I'll do the same.

 

Good luck,

 

Andrew

[Andrew Ikeda 0]

Hello again RRH,

 

Here is a website that may be helpful:

 

www.homeloans.va.gov/lgyinfo.htm

 

I took a look at this site and believe it will answer a lot of questions you may have on VA loans.

Hope this helps! Good luck.

 

Andrew

[-Tony- 0]

Rat_Race_Hater(ImAnEagle),

 

If I live in the home for 2 years I can roll the profits into a 1031 exchange but Im sure I can still do that if it is under option for the 2nd year and I have only lived in it for 1 year(2 years required to live in home for 1031 exchange qualification) Though this might be a way for me to secure a working capital to help in future investment portfolio building.

 

I may be wrong here but I think your a little skewd with you 1031 exchange thinking.

 

if you live in the house 2 yrs of the last 5 you don't have capital gains tax (i.e. no 1031 needed), if you live in it 1 out of 5 you have a partial capital gains. I don't know if you can do a partial 1031 but I think so.

 

Single you can make up to 250k married 500k

 

This would be a good time for Dave T to chime in....

[Dave T 0]

Rat_Race,

 

Unless your tax strategy questions are posted in the Tax Strategies Forum, I don't see them. Often a moderator will call my attention to a tax related question, but I don't usually browse the forums looking for tax questions to answer. Just my explanation why I am coming in so late on your question.

 

Your strategy is to use your VA loan entitlement to purchase your primary residence, then after one year of occupancy you want to convert your primary residence into an investment rental (perhaps selling on a lease option). You also stated that you will rollover your profits into a replacement property in a 1031 exchange to defer capital gains taxes.

 

Your plan is workable IF you can qualify for the loan, but remember that if you BOTH own AND occupy your primary residence for two of the five years prior to the sale, your capital gains are tax free (up to $250K per taxpayer). If you choose to use your property as an investment rental for five years, then you have converted the tax free profit on the sale of your primary residence into taxable capital gains on the sale of an investment property.

 

As for the VA loan itself, I disagree with Andrew on a couple of points. The VA guarantees its loans, so there is no mortgage insurance such as you would have with an FHA loan. The VA also limits the amount you can be charged for certain settlement costs and the loan processing fees are lower. You will have a VA funding fee of 2.25% of the loan amount, but at the bottom line, your total settlement and loan fees will probably be slightly lower than what you might experience with a conventional loan.

 

After you have completed the purchase and satisfied the one-year occupancy requirement, you can lease option the property. If the option is exercised, your profits can be deferred from capital gains taxes if you use a properly structured 1031 exchange to acquire another investment property (not your primary residence). You must keep this property in service for a qualified investment use for at least one year (I suggest two years) to keep your exchange intact. A qualified investment use is defined by the IRS as "production of income" (rental use) or hold for future appreciation. Immediately selling your replacement property on a lease option is not a qualified investment use, and will disqualify your exchange -- making the sale of your relinquished property a taxable event.

 

As an aside, your primary residence is not eligible to participate in a 1031 exchange neither as the relinquished property nor as the replacement property.

 

Tony also mentioned that you might be eligible for a partial capital gains exclusion or a partial 1031 based upon your year of occupancy. Though well intentioned, this suggestion is also wrong. First, now that you know that your primary residence is not eligible to participate in the first place, you can see that there is no such thing as a partial 1031 for your primary residence. Second, you are not eligible for a partial capital gains exclusion based upon one year of occupancy. Two years of ownership and occupancy are needed to qualify for the $250K (per taxpayer) capital gains exclusion. There are exceptions to the two year rule that give you a partial exclusion when life circumstances create a financial hardship. Your situation does not qualify.