Q: Eighteen months ago, my wife and I purchased a waterfront lot where we planned to build our dream home.

During the planning period, we found a beautiful waterfront home with a view to die for. We purchased the home and moved in. It cost us $285,000. Now, we are debating what we should do with our waterfront lot.

We paid $49,000 in cash for it and could sell it now for about $200,000. My game plan is to sell the lot, put a pool in our newly purchased home, install hardwood flooring, replace a few windows, pay off our existing car loan of about $15,000 and buy some real estate lots for investment purpose.

The wife wants to hold on take a loan out against the lot and purchase another property for investment. What do you think?

A: Wow. Let me get this straight. You paid $49,000 for the lot and can flip it 18 months later for $200,000. That’s some investment.

The real question you should ask is how much more appreciation the lot will have going forward. Is it the kind of thing that will double again in 10 years? Would you ever build on the lot and then move into that property (and be able to claim the tax exclusion for your current residence and then that property)?

I think you need to examine the tax consequences of selling today. You’ll basically pay 15 percent on your profit, which is about $150,000, minus the sales commission you pay, if any. That’s $22,500 in capital gains tax. You’d still have $177,500 in cash, but it’s a hefty tax bill. Can you swallow it? Then, sell and move on.

On the other hand, if you decide that someday you might want to build on that lot and the value continues to appreciate, you may want to find another way to finance your boat and pool and other investment real estate property purchases. By building and moving onto the lot, you would be able to shelter up to $500,000 in capital gains tax free, under current IRS law.

Another possibility is to borrow against the property to do all of these things, and keep the land. When you find another investment property, you can try a 1031 tax-free exchange (also known as a Starker Trust). This will defer any capital gains you have on the sale of this investment property.

Of course, one of the problems investors have is knowing when to call it quits. (I’ve noticed gamblers have this problem as well.) If you feel, after you’ve examined all the issues, that the profit you have now is enough for this property, it may be time to pull the trigger, sell, and move on.

Unfortunately, I can’t make this decision for you. But I encourage you to talk to your tax preparer (whose advice you will need if you choose to sell) and think about what you want to do and what you want to buy down the line.

Congratulations on your windfall.

Q: I just read your answer to the writer about things to beware of when building a new home. The writer had had a bad experience building his dream house.

I had a very similar experience. People really need to be aware of what can go wrong when building a new home with an independent builder — even if they have references that check out.

We spent almost 12 months building our dream home only to back out at the last minute because of workmanship issues and material and structural defects that somehow escaped the building commissioner of that town.

After contacting an attorney, we were able to retrieve our money (most of it anyway) and look elsewhere.

A: Thanks for sharing your story.

As you probably now realize, local building inspectors don’t have time to look at everything. If a building inspector is doing the electrical inspection, he or she doesn’t generally have time to look at the carpentry work.

But many new home buyers think the building inspector is a line of defense protecting them from buying a badly-built new home. Unfortunately, this is a huge misunderstanding on the buyer’s part. Another misconception is that if a home meets building codes, it’s safe.

This sounds like it should be true, but just because something is built to code, or appears to be built to code, doesn’t necessarily mean its well built.

One way to protect yourself would have been to hire a professional home inspector to inspect your newly constructed house at four key points: After the foundation is poured, after the walls go up, after the house is plumbed but before the drywall is put up, and before closing.

If you did this and chose a reputable professional home inspector, your home may have been built better — or not, but at least you would have known a little sooner.

Another way to check out independent builders is to talk to a half dozen homeowners, or more, who have purchased homes from this builder over the past few years. Ask these homeowners how well the house has stood the test of time. Were they happy with the builder? Did the builder come back to fix things that went wrong?

I’m glad you were able to get your money (or most of it). And sorry you wasted a year of your time waiting for this house. There are good builders out there. I know you’ll find one next time.

Jan. 19, 2009.