How to calculate adjusted cost basis when you gift real estate when you did not keep any records

[curiousv]

What is the name of your state?WA
If you gift real property you have to file form 709 - gift tax return and donor needs to mention adjusted cost basis ..but how does donor calculates this adjusted cost basis particularly when house was purchased 10 years ago by said donor and he made various improvements by himself and paid cash for help most of the times.

Now the fair market value is almost 4 times than he originally purchased. But donor can not give a detailed proof of improvements ..in this case what number he should enter as donor'd adjusted cost basis ? If he gets audited how does he support this number?

Also what number should be in the column value at the date of gift? it is fair market value or country auditor assessed value?

 

[xylene]

You need professional help with this large gift.

If you are gifting something that valuable it can be afforded.

 

[FlyingRon]

There are a certain class of appraisers who can make a best guess (which is good enough for the IRS) as to these numbers.
I would caution, that gifting real estate while you are alive is often a bad idea for both the donor and the donee.

Note that he gets no credit for his own time and effort he put into improvements. The cost of materials or the labor he paid others counts.

 

[adjusterjack]

he made various improvements by himself and paid cash for help most of the times.

Advice to everybody: Keep records when you do this stuff. And take photos of the work. At least you'll have some documentation of the improvement even without receipts.

 

[Taxing Matters]

What is the name of your state?WA
If you gift real property you have to file form 709 - gift tax return and donor needs to mention adjusted cost basis ..but how does donor calculates this adjusted cost basis particularly when house was purchased 10 years ago by said donor and he made various improvements by himself and paid cash for help most of the times.

Now the fair market value is almost 4 times than he originally purchased. But donor can not give a detailed proof of improvements ..in this case what number he should enter as donor'd adjusted cost basis ? If he gets audited how does he support this number?

Also what number should be in the column value at the date of gift? it is fair market value or country auditor assessed value?

The value you put on the property on the Form 709 is the fair market value (FMV) on the date of the gift. The value of the property as assessed for local property tax purposes is irrelevant. Note that what the basis of the property is does not affect your gift tax computation or the computation of the amount of the unified credit you use up as a result of making the gift. So it doesn't affect you.

But the problem is that the donee (the person to whom you gave the gift) takes as his/her basis in the property the basis that you had in it. If you can't prove basis, the basis is treated as zero. Here, hopefully you have records of what you paid for it when you bought it. But all those cash improvements that you made without receipts leave you unable to provide anything to the donee to prove basis when he sells it (and you should give the basis records you do have to the donee for that purpose). As a result, he or she won't be able to include the cost of those improvements in basis. Always get and keep records anything that affects basis until you sell, transfer, or otherwise dispose of the property or you can get screwed on the tax you pay (or in this case, the tax the donee pays).

 

[curiousv]

There are a certain class of appraisers who can make a best guess (which is good enough for the IRS) as to these numbers.
I would caution, that gifting real estate while you are alive is often a bad idea for both the donor and the donee.

Note that he gets no credit for his own time and effort he put into improvements. The cost of materials or the labor he paid others counts.

Can you suggest what class of appraisers ? and I think cost basis does not matter much because donee is also getting holding period (in this case donor is the owner for more than 10 years ) as a gift and donee is not making more than 10k in income so if donee has to pay long term gain ...total gain tax will be zero..correct me if I am wrong..thanks.

 

[Taxing Matters]

I think cost basis does not matter much because donee is also getting holding period (in this case donor is the owner for more than 10 years ) as a gift and donee is not making more than 10k in income so if donee has to pay long term gain ...total gain tax will be zero..correct me if I am wrong..thanks.

The tax rate for the capital gains is determined by the taxpayer's total income for the year, including the capital gain. So if his ordinary income is only $10,000 but he has a capital gain of $500,000, his capital gain rate will not be zero. It would instead be either 15% or 20%. As a result the adjusted basis in the property may well make a huge difference in the tax paid.

 

[FlyingRon]

What you are looking for is a "retrospective appraisal." We can't make recommendations but you can google the state the property is in and those words and you'll likely find some. Alternatively, you can look up real estate appraisers in your area (the state maintains a list here: https://professions.dol.wa.gov/s/license-lookup) and ask if they do those.

 

[Taxing Matters]

What you are looking for is a "retrospective appraisal."

Just so it's clear, that appraisal can help establish the value of the property at a given point in time in the past but is useless for determining the basis in the property that is obtained by gift.

 

[LdiJ]

Just so it's clear, that appraisal can help establish the value of the property at a given point in time in the past but is useless for determining the basis in the property that is obtained by gift.

I agree. The OP is going to have to establish a reasonable estimate of the money that he spent remodeling the property. That can be done by finding out and recording the costs for the materials in today's prices and then adjusting them for inflation.

 

[FlyingRon]

Yeah, probably not relevant here. It was only on my mine because my father is dealing with settling my mother's estate and we've got a nine-month window to get the stepped up value to be the sales price of the house.