How much capital gains will I pay when selling this house I built myself?

I've been working on a custom home build for the past three years and I'm thinking about selling it. If I end up getting around $3.1 million for the house, I'll make roughly $2 million in profit since I've invested approximately $1.1 million in the construction process. I'm trying to figure out how much I'll owe in capital gains tax if I decide to sell. This isn't my primary residence - it was always meant to be an investment property that I built from the ground up. Anyone have experience with capital gains tax on a custom-built investment property? How bad is the tax hit going to be?

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18 comments

Aileen Rodriguez

•8M

The capital gains tax you'll pay depends on a few important factors. First, since you mentioned this is an investment property and not your primary residence, you won't qualify for the primary residence exclusion ($250K for single filers, $500K for married filing jointly). For investment properties held longer than a year (which yours is at 3 years), you'll pay long-term capital gains tax. The rate depends on your income bracket - either 0%, 15%, or 20%. Most people fall into the 15% bracket, but with a $2 million gain, you might hit the 20% rate. Additionally, there's the 3.8% Net Investment Income Tax if your modified adjusted gross income exceeds certain thresholds. Don't forget to account for all your legitimate expenses in your cost basis - not just the $1.1M construction costs, but also property taxes during construction, insurance, interest on construction loans, architectural fees, permits, etc. These all increase your basis and reduce your taxable gain.

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Aileen Rodriguez

•8M

If they lived in the property temporarily during construction, it generally wouldn't qualify for primary residence exclusion unless they used it as their main home for at least 2 years out of the 5-year period ending on the date of sale. Occasional stays wouldn't count. Yes, state taxes absolutely need to be considered as well. State tax rates on capital gains vary significantly - some states tax them as ordinary income, some have preferential rates, and some (like Florida or Texas) have no state income tax at all. This can easily add another 0-13% depending on location, so it's a substantial factor in the overall tax burden.

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Maggie Martinez

•8M

I was in a similar situation last year with a property flip that turned into a longer-term project. After struggling to calculate my potential tax liability, I used https://taxr.ai to analyze my investment property documents and construction expenses. Saved me hours of headaches trying to figure out what counted toward my cost basis. The tool helped me identify several expenses I hadn't even considered including in my basis - like some of the utility costs during construction and certain carrying costs. It basically created an itemized list of everything that could legitimately increase my basis and lower my capital gains. The analysis even flagged that I might qualify for a specific developer exemption in my state.

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Maggie Martinez

•8M

The analysis was surprisingly comprehensive - my accountant actually complimented the detailed breakdown and only made minor adjustments to what the tool suggested. It captured nuances about construction expenses that I wouldn't have known to include. Yes, it definitely handles depreciation recapture calculations. That's actually one of the features I found most useful because it breaks down which portion of your gain is subject to recapture at ordinary income rates versus the lower capital gains rates. You can analyze multiple properties, though I did them one at a time to keep everything organized.

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Monique Byrd

•8M

Just wanted to follow up about taxr.ai - I decided to try it for my duplex sale after reading about it here. Honestly, it saved me thousands by identifying legitimate construction costs I didn't realize I could include in my basis. It flagged the garage renovation and some foundation work I'd completely forgotten about from years ago. The depreciation recapture calculation was spot-on too. Definitely worth checking out if you're selling an investment property with lots of improvement expenses.

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Jackie Martinez

•8M

If you're selling a $3M+ property with this kind of gain, you might want to talk directly with the IRS to confirm your tax situation before filing. I tried for weeks to get through to a specialist and kept hitting dead ends. Finally used https://claimyr.com and got a callback from the IRS within a couple hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c Since your gain is so substantial, getting clarity directly from the IRS about things like installment sale options or 1031 exchange possibilities could potentially save you six figures in taxes. In my case, I needed to confirm how my previous partial conversion affected my capital gains calculation, and getting that official guidance was crucial.

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Jackie Martinez

•8M

Yes, it absolutely works - I was connected to an IRS representative who specialized in real estate transactions. They don't make the call happen instantly but arrange for the IRS to call you back, which they did within a couple hours in my case. While the IRS won't provide comprehensive tax planning advice, they can absolutely clarify how specific regulations apply to your situation, which is what I needed. I spoke with an agent who confirmed exactly how my specific situation would be treated under current regulations. You're right that for complex planning you'll want a CPA too, but having the direct IRS guidance on how they interpret certain situations is incredibly valuable documentation to have.

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Haley Stokes

•8M

I'm actually embarrassed to admit this, but I tried Claimyr after posting my skeptical comment. I couldn't believe it when my phone rang and it was actually the IRS on the line. The agent walked me through exactly how they calculate basis for new construction versus improvements to existing structures (which was my situation). The clarity was worth every penny because I discovered I was about to overpay on my taxes by incorrectly categorizing some of my construction expenses. Sometimes being proven wrong is the best outcome!

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Asher Levin

•8M

1031 exchanges absolutely can work for self-built investment properties. The fact that you built it yourself doesn't matter for exchange purposes - what matters is that it was held as an investment property. Yes, you must identify potential replacement properties within 45 days of selling your property, and you must close on one of those identified properties within 180 days. This is absolutely strict - miss those deadlines by even one day and the entire exchange fails. Also critical: you cannot touch the proceeds from your sale - they must go directly to a qualified intermediary who will hold them until you're ready to purchase the replacement property.

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