@Bees wrote:
More of a question to @Opus 17 then an answer. I believe you are going to have to reconsider/reduce the basis of your property by the house value at purchase since those assets are no longer part of your home. Then add all the construction costs new home to the value. https://www.irs.gov/pub/irs-pdf/p523.pdf see pages 8 and 9
In the case of an improvement such as a new roof, the improvement must be part of the home when it is sold to be included in the cost basis. For example, if you bought a home in 1990 and replace the roof in 1995 and again in 2015, and sold the home in 2020, only the cost of the second roof replacement would add to the cost basis.
However, I've never heard of the need to remove the value of the home entirely if one demolishes it. (It sounds like a logical extrapolation, but I have never encountered the question before). I agree below that the cost of demolition and the cost of rebuilding are added to the cost basis—I can't really say if the prior home should be subtracted from the cost basis. The taxpayer may want to consult a professional.
