Subdividing my primary residence (New here!)

[Rick Thomas]

Our primary residence for 15 years is on 3 lots. The subdivision was platted in 1927 but this site has always been used for a single home. Time has come to build three houses, sequentially, the last of which will be our new primary. (We'll be renting in the mean time.)

I have figured out a lot of this but I'm suddenly stumped on a tax question. I read that the Gates decision says that if I tear down the old house to build the first two then I lose the capital gains exclusion.

My question is: Is there a way to structure an arms-length partnership to buy the house and two lots - allowing the exclusion - but then also allowing me to gain some of the upside of the new home sales? Or, must I forgo the exclusion and try to justify the deal with the tax cost?

I would appreciate any other ideas about this situation. Thanks!