You use the receipts you got from the suppliers and contractors you employed.

How much you take out for a loan would not be evidence of having spent the money on improving the house in any event. Paying in cash should have no effect on this unless you and your contractors were working "off the books", in which case there are no receipts and you can't add the cost of the improvements to your base.

You will only be required to present documentation if you are audited. Write it all down as accurately as you can and hope you'll never need it. But it would be wise to pay for future improvements with checks and get receipts.

My accountant asked me for the closing HUD from 2005 when my late husband and I built our home. I sold it in 2015 and I have that closing HUD. This is what prompted my question about my renovations since I've paid cash. I have an itemized document from my contractor on what he spent and i paid to him. I know what I've spent, but I've not itemized it. I suppose I should. I have credit card statements that I downloaded for those purchases. It was difficult to save every check image (no paper) for the checking account expenditures. I kept two separate checking accounts, but at the end, I ran over my budget and started writing checks on my other account.

For many tax payers the answer to this question is why bother. A single taxpayer may exclude up to $250,000 ($500,000 if married) of gain for the sale of a home that has been a primary residence 2 of the previous 5 years, and may do that every 2 years.

So like grenades, close enough is usually fine. You really only need to collect records to get within $250,000 ($500,000 if married) of the sale price, then use the exclusion for the remainder. Of course, the more records you have the less chance for their to be a taxable sale in the next two years (really not many people buy a house and make a $250k profit faster than every two years).

Unless you are very old you can't know how long you will live in a house or how much the value of it will appreciate or if the tax exclusion will be in effect when you sell so you should not assume the exclusion will be greater than your capital gain. And I will have to pay capital gains tax on the house I owned before this one since that tax was postponed under the old law.

The question, "How to prove cost of house -- future tax when selling", is unclear.

Is it about expenses for the construction and improvement of a 10 year old house just sold or expenses for the purchase of another house and any future improvements?

Regardless of the capital gain exclusion it will be necessary to state the adjusted cost basis and proof would only be required in an audit. Don't forget to increase the cost basis by the broker fee and other costs associated with or in preparation for the sale.

The exclusion does not apply to a part of the house that was used as a rental property.

I've found documentation on the 10 year-old house that I sold.

My question is regarding the 1939 fixer that I purchased a year ago. I paid cash (checks to subs and credit cards for fixtures) for the renovations that were recently completed. I have the closing on the house that shows how much I paid for it. But, I added a master suite, kitchen, laundry, vestibule, back entry---and renovated the existing structure. I updated the existing house to code since my building inspections for the addition had to include the old part.

So, what renovation cost records will I need to save for the future when I decide to sell?

My contractor, a friend and neighbor from my old neighborhood, is semi-retired. He handled the engineering, plans, permits, and subs for structural (masons, excavator, framers, roofers, rockers, custom windows, etc.), wood floor installation, HVAC and electrical. I gave him "draws" and he has provided those records back to me, itemized and totaled on his company's letterhead.

I paid the finish carpenter, painters, cabinet maker, counter-top maker. I purchased light and plumbing fixtures, appliances, tile and paint. Since I'm not a contractor, what do I need to show for my expenditures? I have invoices from the workers that I paid and for the items that I purchased. Is that sufficient?

Thanks

The summary of the work on the contractor's letterhead should be adequate. If a description of the work is not included make one of your own.

For the material and sub payment, invoices and receipts should be adequate.

In the unlikely event of an audit the IRS would be looking for reasonable evidence that you actually paid for the work instead of doing it yourself. If you are married and haven't lived in the house for decades, it is highly unlikely that you will owe any capital gains tax when you sell. This is not a high priority issue for the IRS in the current real estate market.

If you or your spouse dies before the house is sold, half of the cost basis becomes the market value at that time. The same is true when the second spouse dies. The best strategy is to sell often or never.

I agree with most of what has been said so far except the part about not worrying with it since it only matters if audited, I will come back to that. Meanwhile,it sounds like you need a different accouantant,if this one hasn't answer all these questions already. Some problems with not having ready proof in the event of audit is,(A) audits normally happen after nearly 3 years,6 if income was grossly understated and indefinatly if fraud is aledged. There will be penalties and intrest and to stop them from farthur accumilating you must pay on the spot what the IRS alledges you owe. A $500 tax descrapancy can easily amount to $5k. (B) There is a fine line between fraud and negligence and this only applies to tax fraud. Zealous agents (how many aren't) will liky handle it as if you intentually comited fraud and tack on an amount equal to the national dept which most people will not be able to pay up front until it's settled. That mean's penalties and intrest keep on racking up while you look for proof. I wouldn't want your accountant during an audit. An accountant worth hanging out a shingle can out manuver most agents whereas a dude get's his tail kicked at your expense.

The IRS computers look for the unusual to trigger audits so the likelihood of an audit for the capital gain tax on the sale of a house if only owned for less than 10 years is almost nonexistent. A $500,000 house would have to double in value and have no improvements or broker fee in order to generate a taxable gain.

I was not recommending failing to keep records only that you don't need to get them into presentable order unless you are audited. On the other hand my accountant's only advice was to "be generous" in my records since my house is worth 10 times what I paid for it and the IRS will receive a substantial tax in any event.

" you don't need to get them into presentable order unless you are audited."

You are correct. For annual returns that's something accountants tell stories about over drinks after work. "What's the biggest mess anyone dumped on your desk today?" Accountants are accustomed to seeing records in shoe boxes. That's how i did it every year til he so kindly pointed out what my time was worth compared to his. January first my records might be anywhere between desk,shoe boxes,glove compartment to bedside stand. Before I turn them over to the accountant I've organized them in files and transfered #s to spread sheets. In the case of say a rent house,I give him a single amount for repair and maintainance,depreciable purchases for each period,travel milage and so forth for items I'm certain go in that catagory. If I'm uncertain where the expense/income fit's,the actual reciept is attached to a sheet of paper with hand writen note(s) if nessary. Very few and sometimes no reciepts,checks and other documents ever go to accountant's office. Tax preparation fee dropped a bunch after I started that. That's not an audit but sure is good rehearsel in case one ever must be dealt with.

Can someone tell me what happens tax-wise if I was married when I paid for my house 20+ years ago but, now that it's time to sell, I'm a widow? I'm thinking I only get the $250,000 deduction because I file as single now. I think it's unlikely my profit will be more than $250, 000, but I worry it could be because my area has gone up in value quite a bit. Would it help if I sold a big part of the acreage separately later to defer the capital gains? Thanks!

Hello Gracie. What state is your property located in? (Doesn't change IRS outcome but some states take a cut on sales). I will not ask your age and income but both can have a huge effect on capital gain tax. If you fall in 15% or lower tax bracket for the year of sale,you will likly owe $0 on the long term capital gain.

klem1, I'm in TN. My income, outside of capital gains, is no doubt in the lowest bracket as I farm and that's usually a financial disaster (one reason I'm downsizing). So I assume the tax bracket is NOT affected by the capital gains part of income? Thanks!

That's correct,cap gain doesn't effect bracket. Since property has been farmed,you should have been using an accountant all along. If not,by all means hire one now to help you realize max profits from sale.

klem1, I do have an accountant. Just hate to call him because he's always so busy. I will when it comes right down to making a decision. At the moment, trying to explore options. Thanks!

I am no high roller by any measure ( tax prep average's $150 ) and our accountant has always made time to answer questions and give advice when we ask. 30 minutes of face to face usually cost's $75. Meanwhile,research IRS capital gain rule for low income tax payers.