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If I purchase a home, live in it for two years, demolish it, and build a new house, can I still claim the Section 121 exclusion? Or does it reset the clock? From this 2010 case, it seems the clock does reset:

The IRS argued that the construction of a new residence on the same property as the original residence disqualified the sale from the exclusion.

But that's the only information I can find online. Surely more has been written on the matter in the last 13 years, but if so, I can't find it.

This question is related, but the link in the accepted answer only talks about improvements, not about demolition and rebuilding: Is a "primary residence" the property or the structure itself for real estate sale tax purposes?

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    In general the tax authorities are very generous about what constitutes a renovation of the "same house". As long as you build on the same foundations you have a pretty good chance of it being considered a 'renovation". But check with a lawyer. Commented Apr 14, 2023 at 18:24

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Without changes to the Internal Revenue Code, new Treasury Regulations, or Revenue Rulings, there's not much to go off on.

Tax court cases can provide an indication of the court's interpretation of the laws, but they only apply to that particular case's unique circumstances. A practitioner might use tax court rulings to inform how they approach a similar situation, however.

Private letter rulings by the IRS only apply to the taxpayer and don't set precedent. They also generally aren't made public.

Outside of the above, any discussion or debate would be purely speculative. The vast majority of disagreements with the IRS don't make it to court, so the results never see the light of day.

If there's a lack of clarity in the law, a tax attorney may be willing to argue that the law should be interpreted in a certain way. However, you'd need to be prepared for the expenses of going to court and willing to pay penalties and interest in an unfavorable ruling.

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    Thanks. So long story short, nobody knows, and I'd be taking a risk in trying to take the exclusion?
    – A_P
    Commented Apr 14, 2023 at 17:08
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    Unfortunately, yes. It'll ultimately need to be your judgment on what you want to try to claim.
    – Stan H
    Commented Apr 14, 2023 at 17:24

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