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Tax treatment of Homestead proceeds with addition of garage Apartment?


horn4life

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Real estate gurus, lawyers and other investor braniacs!

First off I know that I can deduct all my profits if the property was my homestead, if I lived in the property 2 out of the last 5 years.  I also know(or think that I do)  that if I bought a property, leveled the existing home and build two units on the property my 2 years of "occupation" could not begin until the new structures were completed and I reoccupied the new structure.

But what if I remodeled the existing home and built a large garage with an apartment over it?  I would need to occupy the existing home that I would add on to, while I got the plans done, and the construction loan in place.  But as long as I do NOT make the garage apartment a condo or other separately deeded unit, I could deduct all my profit if I sold after completion. Corrrect?  I am toying with the idea of adding a 3 car garage with two garages for the existing home, and a deeper one car garage for the 2/2 potential rental unit on top.

The wife and I are toying with the idea of doing something like this next year and I am wondering if the additional new construction has any influence on the tax exemption should we decide to sell after two years?  Hell in Austin it will take six months just to get the plans and permits pulled. (that could be optimistic). 

Thanks in advance

 

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First, you don't deduct profit.  Sale of your homestead is a capital gains transaction, so you have a cost basis and a sale price.  The difference is your gain.  A married couple, or two or more individuals, can exclude up $250k each for the sale of a homestead.  So, $500k may be excluded from income for a couple.

To be a homestead, you have to have lived on the property as your primary residence for 2 of the last 5 years.  The addition of improvements doesn't affect this.  I don't believe renting a portion of the property affects this either.

You get to add your costs of improvement to the purchase price to come to your basis.

Edited by TwiceHorn
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2 hours ago, NeverMarryAStripper said:

One of those is not like the others

I know better than to marry, fuck or rent to crazy...   I understand that some folks like to ignore the middle one... Still it's hard to shake regular crazy, much less stripper crazy.

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