We’ve said it before, and we’ll continue to say it: Save your paperwork, receipts, etc. If you’re ever audited by the IRS, you need documentation. If you have it, things (usually) will go well; if not, expect a battle.
Yesterday the Tax Court decided a basis case regarding an inherited portion of a home. The taxpayers became owners of 1/3 of a house after the 1/3 owner left the home. The owners then sold the home. The only question for the court to decide was the basis of the home for tax purposes.
Basis questions can be quite complex. In general, your basis in your home is the price you paid for the home, plus costs involved in purchasing the home, plus costs for selling the home and related legal expenses (including defending the title), and plus any capital improvements you made in the home. Capital improvements are major repairs such as a new roof or new carpeting; replacing one shingle is a minor repair. And, as always, you must document the improvements.
Unfortunately, the petitioners had no paperwork documenting any of the improvements (which were done by the prior 1/3 owner). Because one of the petitioners is a CPA, the Tax Court stated, “…should have known that such improvements should have been documented if, as petitioners contend, the expenditures constituted capital expenditures….” The petitioners, as a consolation prize, were allowed to deduct $5,000 in legal expenses that the court inferred were expended.