Calculating Property Cost Basis

Q: My mother deeded her property to me in 1998. The basis on her property was $40,000.

Does the IRS track basis costs when a property has been deeded through several generations?

A: If you received the property in 1998 and know that your mother’s basis was $40,000, you now know your basis. If the property had a value of $100,000 at the time you received it as a gift and you turned around and sold it, you would have to pay taxes on the difference.

In simple terms, when people talk about the term “basis,” that term refers to the cost of the property adjusted for improvements and can be adjusted up or down for other reasons. If the property your mom gave you was vacant land when she bought it and it cost her $5,000. Her basis at that time was $5,000. If she put a home on it at a cost of $35,000, the basis of her property would have been $40,000 even though the home might have caused the land and home to be worth much more than the $40,000.

While the IRS has various means to track property costs generally, I am not aware of any specific tracking mechanism they may have for specific properties. The greater issue for any person is making sure they file an accurate and complete tax return relating to the acquisition and sale of a property.

Prior to the elimination of the Rollover Replacement Rule – the rule that allowed homeowners to sell a primary residence and not pay tax on the sale if the purchased a new home for a greater value within two years of the sale – a homeowner filed a tax return with the sale of each residence and a computation of the basis for that residence. If a person bought and sold their primary residence and bought successive replacement residences, that person’s tax return would show the basis for each successive home.

To that extent, the IRS would have records of the basis for a particular property sold and the carryover basis for a property purchased for that person.

If you were looking to determine the basis of a property your mom owned, you would look at the tax return filed for the year or years after the home was sold to see if she filed the required paperwork in connection with the sale of the home.

Published: Nov 19, 2007


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One Response to Calculating Property Cost Basis

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