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Selling a house with unknown capital gains

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  • Selling a house with unknown capital gains

    My mom wants to sell her house. She had it built in 1998. Unfortunately she did not keep many good records. The price she paid for the land is public record, but she doesn't have any receipts for the cost of building it. Checks she wrote to the builder as well as the bank statements those checks appeared on went to the recycling bin long ago. The bank itself isn't even in business anymore so no chance of cajoling old statements from them.

    She might have some notes on paper but these aren't really "evidence" of what she paid. Further, she never kept track of capital improvement costs over the years that would increase her basis.

    My estimate is that she paid about $400-500k total originally. It's now with about $1.25M. That's a 500-600k capital gain after her $250k exclusion. But that's assuming that we could prove that she spent that much in the first place. Never mind capital improvements which we have no documentation of.

    I guess my question is, how do you calculate basis when you have few if any tangible records, other than the price of the land which is recorded in the county courthose, to minimize the capital gains?


  • #2
    can you do some research on zillow or with the county property tax records? I can find records on the home we bought back in 2013 and the records go back to 2001. You might not get the exact value to calculate basis but I bet the assessments from 1999 or 2000 can get you pretty darn close, within $10k, to what the basis would be. I'd give up on capital improvements

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    • #3
      great question, which I will face myself some day. I've no clue.

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      • #4
        Are there insurance policies from back then? That will give a close approximation of the cost to re-build which should be close to what it cost to build it. You could add that to the cost of the land from the property records.

        Are there comparable home sales from that time to refer to? This would give more of a ballpark figure.

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        • #5
          Thank you; all of these are good suggestions BUT would any of these be acceptable to the IRS as proof of basis? I assume they have some rules about this sort of thing but I have no idea what they are or what section of the tax code to even look at.

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          • #6
            Originally posted by morris View Post
            Thank you; all of these are good suggestions BUT would any of these be acceptable to the IRS as proof of basis? I assume they have some rules about this sort of thing but I have no idea what they are or what section of the tax code to even look at.
            Basis is defined in §1012 and a few other sections.

            The real issue here is establishing a fact - how much was paid to build this property. The starting position when it comes to basis with the IRS is that it's $0 unless proven otherwise.

            You have proof that some amount of costs were incurred because the property exists so $0 isn't the right answer. Absent actual records the next best thing is some reference point to approximate the cost basis.

            There's a famous tax court case of Cohan v. Commissioner and the result is what we call the Cohan rule. This allows estimates to be used when it's known that some amount was spent but the exact amount is unknown. The Cohan case dealt with deductible travel and entertainment expenses but I think the same principle applies here.

            So I'd Google the Cohan rule if you want to dig into it.

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            • #7
              First of all, the only time you have to submit proof of the basis for the house to the IRS is if you are audited. Highly, highly, unlikely, especially if she is paying taxes on the sale. I agree with David that she needs to come up with a reasonable approximation of the costs that have gone into the home and use that to “attest” to the basis of the house, keep a copy in your records. Even if she is audited, as long as she can show that she used reasonable approximations from memory and was making no attempt to defraud, then most agents will also be reasonable and give you the benefit of the doubt.

              Sit with her for a few hours and document your remembrances and approximate dates of costs and use that total. Also - possible the contractor is still in business? That might be a resource for the building costs. Otherwise, do the best you can, be consistent, and document carefully and in detail.
              Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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