PS: at the time of subdivision, I would have owned the house for 2 years and it’s rented out the whole time.
@Chunyan Song , This is an interesting question. Most folks believe that performing legal partition only to change entitlements does not constitute the creation of new real estate. It is simply matching up the real estate to it's best and highest potential use. In that case to simply sell the property with new entitlements would still be an appropriate 1031 exchange opportunity. Every accountant will have a different take so make sure yours in on board.
It's pretty clear that once you turn a shovel to change the property you are creating new real estate. And when you do that you create difficulties in the IRS verifying that your intent was to hold for productive use. So if you were to split the lots legally and then build on the lots that would most definitely be creating new real estate with a new holding window to establish intent.
Thank you so much Dave! We are planning to rent it out for a bit after construction to establish intent. Hope it works out!
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