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

Seattle, Washington
Tax, SDIRAs & Cost Segregation
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Capital Gains when developing for extra units on primary residence - seeking advice

Susanne Stauffer
Member since 2020 · 7 posts · 3 votes

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!  

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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
1y

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.

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  • Susanne Stauffer
    OP
    Member since 2020 · 7 posts · 3 votes
    1y

    thanks!

    0Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
    1y

    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.

    Malabute & Company CPAs525 Reviews
    WebsiteView Page
    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Susanne Stauffer, If you are condominiumizing the back units you are creating new real estate that is distinct from your primary residence.  So, yes, that would reduce the amount of property eligible for the $250K exclusion.  But it would turn them into investment property and make them eligible for 1031 exchanges should you ever choose to sell.  This is probably the best scenario of all because $250 K gain exclusion on your primary isn't very much, really.  Especially that you're projecting 5 years into the future.  You'll probably get all $250K of gain tax-free.  And then be able to 1031 exchange the other lots and indefinitely defer that tax.

    Have your cake and eat it too!

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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes
    1y

    Hi @Susanne Stauffer,iIn general, capital gains exclusion under Section 121 ($250K single / $500K married) can still apply to the original primary residence, even if the lot is later subdivided, as long as you meet the ownership and use tests. However, new units built on the subdivided portion are typically considered separate properties for tax purposes. If you sell those, gains would generally be taxable, and depreciation recapture may also apply if any are held as rentals.

    I’d happy to walk you through how to structure it most efficiently when you're ready.

    Feel free to e-mail me or reach out anytime.

    1Reply
  • Susanne Stauffer
    OP
    Member since 2020 · 7 posts · 3 votes
    10mo

    Thank you! 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10mo

    Great answers by @Jason Malabute and @Fulton Abraham Sanchez.  

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