Taxes on Condo-ized Lot split for ADUs

[Matthew Jaeger]

Good afternoon, 

This is purely a tax question on what is essentially the sale of dirt after splitting a lot (though of course not that technically).

I have a standard Seattle lot, 5950 sq. ft. The house is old, less than 1000 sq. ft., pushed up back against the alley. It is small enough to be the DADU, and located well for that. The plan is to HOA/Condo-ize the lot so that the main-house/AADU can be built in the front half. I will be paid out up front for the land that the two new "condos" will be built on. That will buy me out of any ownership stake on the two new residences. I will still own the back half-ish of the lot and the old-house/DADU. Also, this will have been my primary residence for more than two years at the time of the transaction.

How is this taxed? Would it be capital gains? Would it be taxed as straight income? Would it fall under the $250,000 tax free profit?

I appreciate your time and consideration.

Matt