@Boomhauser
1. Yes.
2. You don’t need to report anything until you sell the property. When you sell the property, you will calculate capital gains by using the acquisition date, adjusted cost basis, selling date, and selling price. The acquisition date for real property is the date you acquired the land. The adjusted cost basis is the cost basis for the land plus all the cost that you put into improving the land.
3. I believe the treasury department provides an average conversion rate for each year somewhere on their website. You can use the average conversion rate for the year to convert all the receipts for that year.
4. That comes down to the question of what is a “reliable record.“ The IRS does not have to award any basis you can’t prove. I have never been audited, but it seems to me that a reasonable auditor would realize that you had to pay something for the roof, the question is how much did you pay? Depending on how nitpicky they want to be, they could assume that you only paid for materials and got free labor, and use an average value for the cost of materials, or they might allow you to claim something for labor. You should write down as much as you can remember of what happened; such as the amount you paid, the name of the contractor, And so on, even if you don’t have an invoice from the contractor any longer.
5. Fair market value is not an indication of cost basis. If you bought the house, you could have paid below market value or above market value; you could’ve received the house as a gift with no cost basis; or you could’ve built the house all with your own labor, and your only cost basis is materials. The problem is that multiple courts have ruled that the IRS does not have to award any adjustment to income that the taxpayer can’t prove. This is essentially settled law, and you aren’t going to get anywhere by saying (if audited) “the house existed so it must have cost something.“ It is your burden of proof, not the IRS’.
Most taxpayers are never audited, usually less than one percent. I can’t tell you how likely you are to get audited if and when you sell the home, or how strict or forgiving an examiner will be with your cost basis adjustments. I can only suggest that you make a diligent effort to document as much of the cost basis as you can. You might want to take a few weeks to gather your records, make a spreadsheet listing the costs and the conversion rates, photographing or scanning the documents, and making a big electronic file that you back up wherever you back up other electronic files in case your computer crashes, or your house burns down. Keep your records for as long as you own the house plus 3 years after you sell.
One additional thought. Depending on the amount of government bureaucracy where this house is located, you might have had to file building permits or architects plans with the local government. The local government also might have reassessed the property value for property taxes every time you made an improvement. That would be another source of information about the cost or value of the improvements. It would not be a complete source, but it would be better than nothing.
