Sale of Rental Property but Cost Basis Unknown

Forum|Forum|2 years ago
October 22, 2023
2 replies
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My husband and I built our home in 2008 and converted it to a rental in 2016. We sold it earlier this year. When we built it, we never in a million years dreamed that we would turn it into a rental and thus we didn't keep all our receipts. We have some, but quite a few are missing, including all the labour costs involved in the construction itself. So, we are missing some rather large amounts.

We are therefore not sure how to calculate cost basis. Does the IRS allow FMV to be used, and if so is it FMV at time of the build or time of conversion to a rental? My research leads me to believe that FMV is not allowable but I'm hoping I'm wrong because I'm not sure where to go with this otherwise. Thanks for any help!

Not A Product Question

DoninGA

Employee

The basis of the residential rental property is either the FMV or the original purchase price plus the cost of improvements, whichever is less, at the time of conversion from a personal property to a rental property.

Anonymous_

Employee

For your basis, you would use the lesser of your basis (original cost plus the cost of improvements) or the fair market value on the date of conversion to rental use.

Presumably, the cost of construction plus improvements would be lower than the fair market value in 2016. However, you do need some sort of documentation in the event there is a question revolving around your cost basis. Is the contractor still in business? If so, you should be able to get invoices, contracts, et al. from the contractor(s).

One other issue is whether you have been taking depreciation deductions each tax year since you placed the property in service as a rental in 2016. If you have not, you will need guidance from a local tax professional.

JewelwingAuthor

Thank you very much for this information. Actually, we believe the original construction cost + improvements is more than the FMV at time of conversion in 2016 (it's in a rural area where the housing market hasn't done well until recently). Of course, we naively didn't think to get a market value at the time of conversion. We do have the local authority tax value and we also have an appraisal that was done immediately after the house was built, although I imagine neither of those are acceptable to the IRS. The contractor who built the house is no longer in business and we have been taking depreciation on the property since 2016. Any other words of wisdom you can provide would be much appreciated!

Anonymous_

Employee

@Jewelwing wrote:

.......we have been taking depreciation on the property since 2016....

What did you use for your depreciable basis (considering you do not know your original construction costs plus improvements nor the fair market value on the date of conversion)?

Taking depreciation deductions each tax year since 2016 is a good thing (very good) but, hopefully, the depreciable basis that was used is realistic in some sense.

As a side note, it is most likely less than relevant at this point since the total (accumulated) depreciation deductions will be recaptured with the sale of the property.