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. 

[Steve L.]

I think a Buyer paying a 10% premium for a brand-new spec house versus 2 year old house is doubtful.  Now if you get them during construction and allow them to customize all items your margin would likely go up.  But that has more to do with luck.  

Why not build and refinance.  You get the cash out to use now.