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We have outgrown the home we've lived in 15 years, it is time to move on.

We are exploring our different options to do so. One of the situations we are considering is tearing the place down and building a new house on the same property.

Normally as I understand it, on sale of this property, we would be eligible for the capital gains exception since we have been here more than 2 years.

I've read through IRS Publication 523 and there are some statements in there that make me uncertain if this holds in the case of a complete rebuild such as:

Home Moved to New Location

If you move your home from the land it was on, that land no longer counts as part of your home. For example, if you move a mobile home to a new lot and sell the old lot, you can’t treat the sale of the old lot as the sale of your home.

Here it seems they consider the structure the defining component of the 'home', and the land secondary: The 'home' is wherever the structure is. I could see them treating the tear-down and rebuild scenario similarly: If it isn't the same structure, it is not the same 'home' anymore.

If we tear down the existing house and rebuild a new one in its place, are we still eligible for the capital gains exception or do we have to live in the new structure for 2 years?

  • Are you not planning to live there for 2 years? Just build a new house and sell it? I wonder if you could sell your house to a shell company to get the exclusion then sell the house from the company? – D Stanley Jun 9 '17 at 14:06
  • @DStanley we are not wanting to stay for 2 more years. I'm not sure how the shell company plan would play out. If we decided to go this route, (tear down and rebuild) it would be because the lot and area can support a much larger and more expensive home than we currently have. It is one of the smallest and oldest for several blocks. Selling as is to a shell company, then rebuilding and selling, wouldn't the capital gains just fall on the shell company then? It doesn't seem we would be escaping that. – Mr.Mindor Jun 9 '17 at 14:29
  • You're right - My logic was off. – D Stanley Jun 9 '17 at 14:33
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From this page it looks like a rebuild negates any previous residence.

The Tax Court held that taxpayers who demolished a home they had lived in for more than two years, built a new home on the same lot, and then sold the new home without ever living in it were not entitled to exclude the gain from the sale from income under Sec. 121.

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    That includes "without ever living in it". It doesn't necessarily say anything about what happens if the owner moves back in immediately after the rebuild (which is what I assume the OP will do). – TripeHound Jun 9 '17 at 10:10
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    Well, it resets the two year requirement. – Peter K. Jun 9 '17 at 11:07
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    I'm guessing this may be one of the reasons why you hear stories about everything but one wall getting torn down in a rebuild. I guess the next question would be (and maybe off topic for this site) how much if the original would need to remain. – Mr.Mindor Jun 9 '17 at 14:14

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