Posted by Dave T on February 21, 2001 at 10:21:23:
The capital gains exclusion on the sale of a personal residence does not apply to this situation. If you divide your property and sell the extra lot as you propose, your sale will be subject to capital gains tax on the sale of investment property.
You will have to establish your cost basis for the separate lot by allocating a portion of your original purchase price to this piece of property. The remainder is your purchase price for your principal residence.