My husband and I bought an abandoned house 4 years ago that we planned to gut-rehab over a 3-year period and move into. Soon after, however, we began to have marital problems so we never got very far with the project. We probably put in $100-$150K of improvements. We are now getting a divorce. We want to sell the house and use the proceeds to buy a house for me and the kids. My husband will stay in our longtime home that we never moved out of. Here is my question: Since the gut rehab was intended to be our primary residence but was never inhabited due to our marital problems, can we roll it over into the purchase of the new house that will become my primary residence in the divorce? Or do we have to pay capital gains on it? Because we bought it in a bank fire sale, we expect the profit to exceed the value of our improvements.

In sum:
House #1 = primary residence past 15 years...husband will keep
House #2 = gut rehab, purchased with intention of making primary residence -- never lived in
House #3 = new home purchase for wife and kids to live in post-divorce (hopefully to be purchased with proceeds from sale of House #2)

Please advise quickly. Thanks so much!

My husband and I bought an abandoned house 4 years ago that we planned to gut-rehab over a 3-year period and move into. Soon after, however, we began to have marital problems so we never got very far with the project. We probably put in $100-$150K of improvements. We are now getting a divorce. We want to sell the house and use the proceeds to buy a house for me and the kids. My husband will stay in our longtime home that we never moved out of. Here is my question: Since the gut rehab was intended to be our primary residence but was never inhabited due to our marital problems, can we roll it over into the purchase of the new house that will become my primary residence in the divorce?============>>>I do not think you can roll the gut rehab into the purchase of the new house;however, you can dedcut gut rehab costs when you dispose of the home. Your tax basis in your home will be a key factor in calculating your tax gain or loss when you sell your home; the gut rehab costs increase original basis of the home and it’d decrease your taxable capital gain amount.

Or do we have to pay capital gains on it? ======>>Yes; aslongas your FMV of the home EXCEEDS the adjusted basis of the home; However, UNLESS your marginal tax rate is over 15%, your LTCG tax rate is 0%; of your marginal tax rate is higher than 15% then your LTCG rate ‘d be 15% of the LTCG. It’d be 20% of the LTCG if your marginal tax rate is 39.6%