In Dec 2010 we purchased a very old home on 14 acres in Western PA. During the process of doing a massive renovation (close to a rebuild) I accepted a job in CA. We decided to continue with the renovation but to make sure we didn;t lose on the deal, we decided to sever the property into 4 lots - 1 had the house and the other 3 were strictly building lots.

The house cost + renos + legal fees + surveyors fees put us $120k over purchase price. In 2011 we sold the house and 1 lot for a total that left us at the end of 2011 $40k short. In 2012 we have now sold 1 more building lot that now has us approx $25k above our total, all-in costs plus we have 1 lot remaining.

Now to the questions... The property was purchased as our primary residence. We moved into the residence and lived there for 3 months. I now have a 1099S for the lot that we sold and I am obviously going to get one for the lot we sold in 2012 and hopefully another in 2012 for the last lot. How in the world do I get all of this right on my taxes? Assuming I am required to pay on the gain, since the entire process wasn't completed in 2011 I actually have a loss in 2011 but a gain in 2012... and is it fully taxable because it is "income"? Is it taxed as a capital gain? Is it taxable at all since it was my primary residence? Any/all advice would be appreciated. Thanks!

“How in the world do I get all of this right on my taxes? Assuming I am required to pay on the gain, since the entire process wasn't completed in 2011 I actually have a loss in 2011 but a gain in 2012... and is it fully taxable because it is "income"?”---->In general, taxpayers who engage in regular sales of r/e is considered to be a dealer, an d any gain or loss recognized is ordinary gain /loss rather than CG/CL;however, under sec 1237 provision, a nondealer, I guess , you are a nondealer, who subdivides a tract of real pty into lots(2 or more pieces are considered to be a tract if they are contiguous).part or all of the gain on th e sale of th e lots may be treated as a CG/CL as long as during the year of sale, you must not hold any other pty primarily for a period of at least five years; no substantial improvement may be made by the taxpayer holding the lots if the improvements substantially enhance the value of the lots; unless the pty is acquired by inheritance or devise, the lots sold must be held by the taxpayer for a period of at least five years; the tract or any lots may not have been previously held primarily for sale to customers in the ordinary course of the taxpayer’s trade/business unless such tract at that time was covered by sec 1237.
“ Is it taxed as a capital gain? Is it taxable at all since it was my primary residence? “----->It depends on the situation as described above.