Your cost basis is what you paid to build or improve the house. Amounts you borrowed have nothing to do with it.
The cost basis of house #1 is what you paid to build it. Include the cost of the land, plus what you paid to contractors for labor and materials. You can't include a value for your own labor. You can include legal expenses like title searches and land surveys. You can include required inspections that are part of the building process (fire inspection, electrical inspection, etc.) You can include fees for building permits. You can include the cost to bring utilities onto the land if you had to do that (water, gas, sewer, electric). You can include other costs you paid to permanently improve the real property (the land) even if they are not attached to the house -- like planting trees and shrubs and doing landscaping. You can't include costs for items that are no longer permanently attached to the real property. For example, if you build the house in 1990 with a deck, and in 2010 you took off the deck and installed a patio, you can include the cost of the patio but not the deck.
This has nothing to do with loans or mortgages. Suppose that for house #1, you had a $180,000 construction loan/mortgage, but you actually paid $200,000 when you add in legal fees and more recent improvements. Your cost basis is $200,000. (Likewise if you had a $180,000 construction loan but you only actually paid $175,000 to build the house, your cost basis is $175,000.) If you pay off the first mortgage and then take a second mortgage for $250,000, then the cost basis for house #1 is still whatever you actually paid to build or improve the house, no matter what you use the proceeds of the loan for. If you used $10,000 to remodel the kitchen of house #1 and $240,000 to build house #2, your cost basis for house #1 increases by $10,000, it does not increase by $250,000.
Likewise, your cost basis for house #2 is what you actually paid to build house #2, no matter where the money came from. It is not zero because the money was borrowed, and it is not $250,000 because that is what you borrowed; the cost basis for house #2 is what you actually paid for the land, the labor and materials and legal expenses, no matter where that money came from.
The amount of mortgage loan(s) and what you used it for doesn't matter. Only what you actually paid to buy, build and improve the property.
