Take $250000 exclusion for tear down and flip property? How long to wait?

[NewUserNov2020]

RE: the capital gains exclusion? $250k homeowner's exemption tax break for tear down flip property; Take $250000 exclusion for tear down and flip property? How long to wait?

Question: I own a house I've lived in for many years, say 10 years. I then tear down this house and on the new plot of land build another new house. Can I flip that house as soon as construction is completed, and qualify for the $250k homeowner's tax break?  Or do I have to live in it for two years and then sell it? 

My intuition says no, I must live in the new house for two years, even though I've lived in the old house for ten years before it was torn down. 

I use Turbotax but there's no need to tell me where to find it on Turbotax, I can figure that out. 

Thanks.

Web:

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

[tagteam]

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@NewUserNov2020 wrote:

....do I have to live in it for two years and then sell it?

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Per Section 121 of the Internal Revenue Code, you need to own the house and live in the house, as your principal residence, for two out the last five years leading up to the date of the sale (basically 730 days, which do not need to be consecutive). There are exceptions which don't seem to be applicable based on the facts you stated.

If you tear down the house that you were using as your principal residence and build a new one on the lot, then you would have to use that new house as your principal residence for two years (assuming no exceptions apply); the property includes the dwelling, not just the land, for the purposes of Section121.

There is actually a tax court case (not that they carry infinite weight) that is almost exactly on point.

See https://www.journalofaccountancy.com/issues/2010/oct/exclusion.html

[Bsch4477]

It’s still your primary residence, just did a major remodel!  You are eligible for the exemption and can add the cost of the rebuild to your cost basis. 

[tagteam]

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@NewUserNov2020 wrote:

My intuition says no, I must live in the new house for two years, even though I've lived in the old house for ten years before it was torn down. 

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Your intuition is correct; you must live in the new house for two years before you would be eligible for the exemption.

The exemption requires a dwelling as well as the land (in this case) and a tear down can in no way be considered to be a major remodel (the entire structure is gone).

I will agree that you can add the basis in your old house, and demolition costs, to the basis of the newly constructed house.