Is a "primary residence" the property or the structure itself for real estate sale tax purposes?

Question

If I build a new house on a property, will that qualify for the capital gains exclusion on a sale of primary residence?

For example, let's say I buy either an empty piece of land or one with a house and I demolish the house and it costs me $300,000. I then live in a trailer on the property and list the property as my primary residence. I build a new house and it costs me $250,000 in expenses to build the house and it takes a year to build the house. I then live in the house for a year, until I have lived on the property for a total of 2 years. I then sell the house for $700,000 and claim $250,000 in capital improvement expenses. Can I then exclude the remaining $150,000 gain under the primary residence exclusion?

Answer 1

Yes, if you are living there for 2 years, up to $250k is exempted from the capital gains tax. And you can add the capital improvement expenses to the cost basis of the property. See the link below for an almost exact example.

https://www.houselogic.com/finances-taxes/taxes/tax-breaks-capital-improvements-your-home/

Answer 2

Subject to certain restrictions (such as a maximum length of time that a "primary residence" can be under construction without physically living in it), a home under construction can be a primary residence (for U.S. tax purposes) from the time you begin construction until the home is ready for occupancy, even if you do not physically live on the property while it is under construction.

According to IRS Publication 936 "Home Mortgage Interest Deduction":

You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. The 24-month period can start any time on or after the day construction begins.