Harlan Lunsford <lunstax[at]bellsouth.net> wrote:
- quote -


Dear Mr. Lunsford,

Thank you so much for your reply. I suppose I need to talk
this over with a CPA or real estate attorney before
embarking on this. In the municipality that I live in,
there basically is no difference in the legal/permit
procedures for demolishing a house and rebuilding it and
renovating it. For example if you demolished all of the
house except for a garage wall...is it a demolition? or a
major renovation? It seems that you are saying that if it
is a renovation, I get the capital gains benefits...if its a
demolition, I don't?

thanks for reading this!!

Jim

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Harlan Lunsford <lunstax[at]bellsouth.net> wrote:
- quote -

There is no deductible loss on demolition, but you can add
the demolition and renovation costs onto your original
purchase basis when you sell the renovated or new house.

Whether the property still qualifies for the exclusion is a
good question I've wondered about myself, so I did the
research. The exclusion applies to property owned by you and
used as your principal residence for at least two years out
of the last five years. Property is not well defined, but
generally must include sleeping quarters and toilet
facilities.

If you renovate the property prior to sale, I believe it
would still qualify. If you gut it and renovate it
substantially, I believe it would probably still qualify. If
you take it down to the foundation and rebuild it, it might
still qualify (This is the grey area where I will not say
for certain). It probably won't still qualify if you
completely demolish the old house and build a new house.
This situation is getting too close to an old revenue ruling
that denied exclusion where the taxpayer sold the property
upon which his home was located and then moved his home to a
new location.

To be safe, you should live in the new house for two years.
Or, sell the property first, then do the tear down and
rebuild (don't know how that could be structured). How to
identify the amount of reconstruction done may be difficult,
but I would recommend the taxpayer maintain proof that some
portion of his original principal residence remains in the
newly renovated home.

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borges wrote:

- quote -

The only part of your query that needs answering is about
the demolition. Your house, personal residence, whatever,
is personal use property. And when voluntarily demolish
it, there is no deductible loss, nor can that cost be added
to any other basis.

Cheer$,
Harlan Lunsford, EA n LA

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I have a house that I've lived in for the last 3 years. It
is in terrible condition and would not bring much money if I
just sold it. I'm single and wanting to sell it and want to
minimize the capital gains taxes.

If I sell it as is...whatever gains I make up to 250K are
tax free.

If I say spend say 50K renovating it, then I can add 50K to
the "cost" of the house and still have whatever I make above
that up to 250K be tax free, right?

Now for the "idiot's limit" question. Suppose I demolish
the house and build another house in the same spot for say
300K. I can then add 300K to the "cost" of the house and
still have cap. gains exclusion above that up to 250K,
right? wrong?

It just seems to me that there really isn't any legal way to
identify whether a demolish/rebuild or a major renovation
has occured on a house.

Anyway, thanks for your thoughts on this beforehand.

Sincerely,

Jim

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