Sub-Divide Personal Residence

Today TaxMama hears from Scott in Connecticut who tells us. “I have a primary residence which I have occupied for more than 2 years. I‘d like to divide the property and sell some of it. How will the proceeds be treated from a tax standpoint?”

Hi Scott,

If you’ve been using the whole property as part of your primary residence, when you subdivide it into two lots and sell one of the lots, you will be able to use your $250,000 ($500,000 for a couple filing jointly) residential exclusion on the sale.

You will need to reduce the basis, or tax cost, of your home by the amount of the sales price on that parcel, less costs.

Then, stay in that house for another two years – and you may sell off your personal residence again – and use the full benefit of the $250K or $500K personal residence exclusion.

Remember, your profit will be based on your adjusted basis after the last sale.

If I were you, with this much money at stake, I would pay a tax professional to give me a written opinion, citing code sections, regulations, rulings and/or precedents. I would also ask them to spell out, in writing, what the basis adjustment would be to the whole property.

It may cost you a few hundred dollars. But if it will save you tens of thousands of dollars in taxes in the long run, it will be a wise investment.

And remember, you’ll find answers to lots of questions, about real estate profits and other tax information, free. Where? At TaxMama.com

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