Minimizing Taxes When Building and Selling Homes – Advice Wanted

[Jeremy Santy]

Hey BP community,

We’re wrapping up a new home build in Kauai and are considering selling it and starting another project. Buying land, building and selling (not part of a formal construction business), and we’re trying to understand the smartest way to minimize our tax liability from the sale.

Has anyone here gone through this and found good strategies—like structuring it as a primary residence, using a specific entity setup, rolling gains into the next project, or anything else that’s worked?

We’re not looking to flip casually but are open to building more long-term if it makes sense financially. Any advice, examples, or pitfalls to watch out for would be appreciated.

Thanks in advance!

[Dave Foster]

@Jeremy Santy Like what @Melissa Justice said, you must have lived in the property for two out of the previous five years you've owned it to qualify for the 121 exclusion, allowing you to take the first $250k ($500k if married) of the gain tax-free.

In order to qualify for a 1031 exchange, which would allow you to defer all of the tax and depreciation recapture to reinvest into another investment property, you must have had the intent to hold it for investment use.

Most folks feel that any hold over a year is adequate. But there is no statutory holding period to determine when a property qualifies for a 1031 exchange, but most importantly, how you demonstrate the intent to hold. So, traditionally, longer would be better. This is why fix n flips don't meet this criteria because they are held as inventory and not an investment. Say you put a renter in the property for a year, then that would be perfectly fine.

Occasionally, there are cases where some unexpected catalyst will cause an investor to sell, or they receive an offer that was too good to refuse, despite their intent to hold. These situations can happen, but when they happen multiple times, they seem a lot less "accidental".

If you can stretch your timelines a bit. And build, rent, and then sell, you'll add another 20-30% to your bottom line. and get the benefit of depreciation on your tax bill.