As you said, there are many possibilities to consider here. Firstly, I will have to assume the profit on the sale of your former primary residence qualified for the exclusion on the sale of a personal residence.
What you are proposing is a type of land development. Before we get into the numbers there are a couple of items that you may want to consider before doing what you propose:
Does the municipality in which your new purchase resides require a land development plan before you can sell off/build on other segments? You should check with the municipality when you apply for permits, if necessary. Also, there are certain regulations here and there that if you were to sell multiple parcels you could be considered a real estate dealer or professional and that could make the profit subject to ordinary income and possibly self employment tax. You should consult with a real estate professional about that possibility.
Now for your potential sales.
It would be advisable to obtain an appraisal on the current value of the house, garage, and individual lots if you do not already have one for allocation purposes. You purchased the entire property for $400,000 so some conclusions can be made regardless of whether you have an appraisal or not. From your scenario, it appears you have a house on one lot, a garage on another lot, and 5 additional lots.
Total envisioned costs as you have laid out: $400,000 initial purchase plus $70,000 in renovations with $10,000 to the existing house and $60,000 to the garage to complete the new residence.
Possible allocation based on your believed sales values and possible appraised values from above per total expected to be expended:
Value of house plus 2 lots - $240,000 (Future value of $250,000 less $10,000 in renovations)
Value of 2 lots - $50,000
Value of future residence before renovation - $190,000 (Future value of $250,000 less $60,000 in renovations)
Total allocation base: $480,000 ($240,000 + $50,000 + $190,000)
Total Potential current value based on the purchase price of $400,000:
House plus 2 lots - $200,000 ($240,000/$480,000*$400,000), net gain $40,000 ($50,000 less renovations of $10,000)
Value of 2 lots - $41,667 ($50,000/$480,000*$400,000), a gain of $8,333
The cost basis of future residence - $218,333 ($190,000/$480,000*$400,000) + $60,000
You should be able to use the above valuation formula for any of the proposed sales you are envisioning.
Each sale you make must be able to stand on its own merits as to the allocation of the original cost and any additional improvements made specifically to the property sold.
The amount of capital gain tax you pay will be based on whether it is long-term or short-term obviously. Any short-term gain is taxed at your ordinary income rate and any long-term gain will be taxed based on your taxable income but can be anywhere from 0-20%. There is also a 3.8% Net Investment Income Tax on investment income that exceeds certain modified adjusted gross income limits.
Capital Gains Rates
Net Investment Income Tax
@adringley
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