Tax treatment of Homestead proceeds with addition of garage Apartment?

[horn4life 3,838]

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

 

[TwiceHorn 32,076]

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 September 30, 2019 by TwiceHorn

[horn4life 3,838]

I was about to say I was gonna rent the house to strippers in order to try and get a response!  

I was thinking that as long as I did not tear down the primary unit I would be good to go.  Need to do some setback and impervious cover math, and some financial math.  

[NeverMarryAStripper 22,294]

I was gonna rent the house to strippers

I would not recommend that

[KaiserSoze 1,017]

^^ Listen up! Beyond not marrying a stripper, this is the best advice you'll get from this guy.

[horn4life 3,838]

I know better than to marry, fuck, or rent to strippers! 

But if if I installed toilet cams... hmmm... extra income stream... so to speak...

[Judge Roybeanbag 11,860]

9 hours ago, horn4life said:

I know better than to marry, fuck, or rent to strippers! 

But if if I installed toilet cams... hmmm... extra income stream... so to speak...

Germans will pay extra for that during F1 and ACL.

[NeverMarryAStripper 22,294]

21 hours ago, horn4life said:

I know better than to marry, fuck, or rent to strippers! 

One of those is not like the others

[horn4life 3,838]

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.