Capital Gains when developing for extra units on primary residence - seeking advice

[Susanne Stauffer]

I own a home - my primary residence- in Seattle and plan on developing the back portion into couple/several units.  I will be able to subdivide the lot - back units will be condominiumized.   I will either sell all the back units or sell portion and keep portion as a rental.  I have lived in my home a long time and thinking about how the current capital gains exclusion would work in this case, when Igo to sell, five years from now - kids going to highschool so no-go for moving to smaller unit in back.)  Pay tax on the new units that I sell and keep  the $250K exclusion for the original house (but now the lot is smaller?)?    I understand tax advice is specific to individuals/timing/location/situation and I need to hire a CPA -  but in general how would this be done? Have you done this? Thanks all!  

[Jason Malabute]

You’re asking a great question, and it’s smart that you’re thinking through the tax implications now. Generally, the $250K capital gains exclusion can still apply to your original home as long as it remains your primary residence and you’ve lived there for at least two out of the last five years. But once you subdivide the lot and develop or sell the new back units, those are likely treated as separate properties for tax purposes—and they won’t qualify for the same exclusion. These projects get complex quickly, especially with things like subdivision, condo mapping, and partial sales, so it’s a good idea to consult a CPA who understands real estate development.