An Over-The-Top Residence with an Understated Basis

People routinely overstate the capital gain on the sale of their residence by understating the cost. We saved our client over $24,000 in income tax by accurately reconstructing the tax basis in their home.

We endeavor to maintain an accurate tax basis in our client’s residential property. This can be a daunting task, particularly in the absence of a disciplined historical accounting. Even clients who are relatively meticulous in their recordkeeping may overlook certain items that augment tax basis.  As your Business Manager, we scour your accounting records to ensure that the basis in your home takes into account every conceivable expenditure that can reasonably be incorporated into the cost.

One of our clients, a young professional couple, learned firsthand the benefits of having an accurate set of books and records. The client demolished the dwelling they had purchased several years prior. In place of the dilapidated tear-down they built a dazzling contemporary showcase.  The client unexpectedly sold the home a few months after completion when they received an unsolicited bid at $1.3 million above their presumed cost.  It was an offer they could not refuse.

The client maintained a running account of the house expenditures in Excel. Their spreadsheet showed the cost at $2.61 million. As their Business Manager, a high priority task was to verify the cost basis in their home, particularly in light of the impending report of the gain on their tax return. We combed through prior bank and credit card statements as well as invoices from contractors, engineers and city agencies. We searched through folders and banker’s boxes and reviewed hundreds of pages of documents. After an exhaustive study, we concluded that the total cost of the house was $2.69 million, $80,000 greater than our client’s tally.  The couple had neglected to include several items in the basis including demolition costs, building permits, half of the structural engineering expenses, legal fees in connection with a dispute over an easement, and the cost of relocating some trees. With the newly established basis, our client’s taxable gain was $80,000 less than the original estimate, saving them $24,000 in taxes.