Living in New Construction to Avoid Capital Gains

[Will R.]

I spent a long time looking for an existing thread on this but could not find one. I have been a reader for a long time and this is the first time I have created a thread because every other time I have found one. Here is my situation:

I purchased a house a few years ago from a hoarder and got a great deal. It is a large lot in central Austin. I am am now finishing subdividing the lot to build new on what was the side yard. What I am wondering is what people think about living in new construction as my primary for 2 years to avoid gains/income tax. The main question I cannot find data on is whether the value of a home drops when it is not brand new. Obviously, when you drive a new car off the lot it loses most value. Homes are not that extreme, but how much so? How much more do people want a brand new home vs a 2 year old home? Also, how does the my capital gains exemption work if I keep the subdivided part of the lot?

Estimates: I purchased at $355k. I have around $50k in on renovations from when I purchased and will put another $100k before sale. I think the existing house will sell somewhere around $900k. Will hopefully not pay any taxes on that transaction because it is my primary. Then, we will build new on the vacant lot we subdivided off. I am uncertain what the return will be but I estimate $150/sf on construction and $350/sf (conservative) sales price over 3000sf. I could clear around $600k. 

It seems like a no brainer to try to shelter that from the potential of income tax by living in it. Does that sound right? Does anyone know if a 1031 would work in this situation even if I have not rented it out? 

Thanks in advance for your thoughts.