Tax implications on flipping a house we've owned for 30 years

[Caleb Walters]

We are going to sell an old house that has been in the family for years.  It's a tear-down property.  I am running the numbers on the idea of tearing it down and rebuilding it myself, then selling the new construction.  The biggest unknown for me is the tax implications.  I understand how the equity in the house will be treated if we sell it today without any work.  If we completely tear it down and rebuild (which will require a construction loan over $500k), will this change our tax treatment?

[Dave Foster]

You've got a couple of options on how you treat this property to reduce the tax implications (whatever they are as @Natalie Kolodij described so well).

1. You could sell as is and 1031 exchange  (if it's not your primary residence) and buy other investment real estate.  By doing this you would complete defer all tax and depreciation recapture.

2. You could advance your plan of building and selling.  In this instance you are actually acting as a builder/dealer and probably could not use the 1031 exchange.  So you would pay tax on all profit and my guess is it would be at ordinary income/self employment levels.

3. You could do a hybrid of this - re-construct the house, then use it as a rental investment and later evaluate it for potential sale.  This would let you get the biggest bang for your construction/sale buck and also position the property for you to use the tax deferral of the 1031 exchange.