Build 2 Housing Units, Sell One, Live in Other

"Hi Carl,

Thanks for keeping up this blog. It's a wealth of information. I just
finished reading the full book from Amazon and am ready to start moving

I have funds from the sale of a previous business that will allow me to
purchase a property with all cash. In my town, it's popular to buy an old
house, demo, subdivide into 2 lots and build a new twin.

I'd like to do the same, except sell one and live in the other. My

1. Do lenders look at this as a standard owner-occupied construction loan
(since I'd be living in one side) or a commercial project?

2. Would I need to create an LLC to purchase the land and limit liability or
should I just purchase in my name?

3. Can I build tax-free equity in both sides at once? In other words, if
land costs are $150Kand total building costs are $350K then my investment is $500K.

If I sell one side and net $350k, my total investment in the property is now back to $150k. If my side appraised for $375K and I have $150K in sunk
costs, I would have created $225K in tax free equity, right?

Thank you!

Hi Bill,

1. Both, as you are subdividing the property into two lots before building. One lot will be considered an owner occupied residential lot and the other will be a commercial investment (built for sale) property.

By the way, be sure you check with your local zoning department to be sure that the property is already zoned for duplexes before you even make an offer to purchase.

2. It is doubtful that a lender will make a loan to your LLC. (Consult with a Real Estate Attorney as to Liabilities.)

It is also doubtful that a lender will finance a “spec” house (house built for sale) in this current housing market.

3. Wrong. I am not a tax expert, but I believe that the sale and profit of the “spec house” will be treated as “straight income”. I believe that would amount to $100, 000 taxable income on the sale. ($350,000 (sales price) minus $250,000 (½ the lot cost of$75,000) and ½ the building cost of$175,000.

You would then have $125,000 equity in the house you are going to live in.
(Appraised value of $375,000 less $250,000 (½ the lot cost of $75,000) and ½ the building cost of$175,000).

And, you must live there a year before you sell it to have any profit treated as “capital gain” To claim the IRS $250000 capital gain exemption you must own and live in the house for 24 months in the 60 month period prior to the sale.

Consult with a Tax Advisor for further clarification.

Good luck and thanks for the compliment,
Carl Heldmann, byoh