Hello,
I have a tax question that is very specific and I was hoping you could
help.  The situation is this, we just got married October 1st and I
believe, based on what I have read, we will be considered married for
the whole year.  In March we sold my wife?s condo, which she lived at
for 3 years, and she moved into my house which I have owned since
1997.  In April we bought a house about 10 minutes away for my current
house with the intent to tear it down and build a brand new house. 
This process is about a year long and still has several more months
before we can move into the new house.  My question is this, how do we
treat the second house, the tear down and rebuild, on our taxes?  Can
we simply call it a vacation home and use the rules that apply to
them?  Also, when we do move into the new house and sell my current
house will we be we charged capital gains tax even though I have lived
here since 1997?  Finally, will we be charged capital gains taxes this
year for selling my wife?s condo?
Thanks!
-RZ301

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Request for Question Clarification by pinkfreud-ga on 31 Oct 2005 11:44 PST

This question isn't within my areas of expertise, but it will help
other Researchers if you let us know which nation's tax laws should be
considered here. Google Answers receives questions from all over the
world, and we have no way of knowing where you live.

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Clarification of Question by rz301-ga on 31 Oct 2005 14:09 PST

To clarify, we live in Seattle, WA.

I am answering this assuming you live in the US. 

Married couples filing jointly may exclude up to $500,000 in gain on
the sale of a principal residence, provided:
 - either spouse owned the residence 
 - both spouses meet the use test, and 
 - neither spouse has sold a residence within the last two years. 
If each member of a married couple owns and occupies a separate
residence and files jointly, each may exclude up to $250,000 in gain.
Also, if it's a new marriage and one spouse sold a residence within
two years before the marriage, the other spouse may exclude up to
$250,000 in gain on a residence owned before the marriage.

It sounds like you should be able to exclude up to $250,000 of your
wife's gain (which should be more than enough) on her condo and an
additional $250,000 on the sale of your home once the new house is
built. Assuming you don't sell that home within 2 years, you will be
eligible to exclude the full $500,000 the next time you sell.  Keep in
mind, however, that the total amount of excludible gain is limited to
$1,000,000 (I think).

You should treat the new home as a second home. You can deduct
mortgage interest up to a total of $1,000,000.  You can also deduct
property taxes the same as you would on your principal home.

This is great news, thank you very much!