Determining Cost Basis

[tomboy257]

We sold a vacation home this past year.  We purchased the home unfurnished and sold it furnished. Can I include the cost of the furnishings in determining the cost basis? And can I use replacement cost for any items we brought from our main residence that we don't have reciepts for?

[DawnC]

No.  The property is only what is land and the structures that are permanently attached.   The sale of the personal property in the house would be a separate transaction.    You can add capital improvements done to the property to the basis.  This would include things like:

• Remodels and room additions (including decks and porches)
• New or upgraded landscaping, irrigation, sprinkler system
• Hardscape such as pavement, block or retaining wall, patio
• Fencing
• Swimming pool, spa

Where do I enter the sale of a second home, an inherited home, or land on my 2021 taxes?

Do I have to report personal items that I sold?  (only if it there is a gain on the sale)   You can't deduct personal losses.  The basis of those items is the original cost; search your bank statements.   If you don't know or remember the original cost, yes, you can use replacement value.  You should make a "good faith effort" to ascertain the Fair Market Value (FMV) of the personal items you sell at a profit (for more than you originally paid for it).  

[tomboy257]

The fact that it was furnished was an additional incentive to the buyer. The home was a manufactured home in a retirement community and there was no additional bill of sale for the furnishings.  There must be some place that the value of the furnishings can be added to the cost basis of the investment.

[DianeW777]

Yes, you are correct.  However as our awesome Tax Expert @DawnC pointed out it must be two separate sales when you report it for tax purposes.

Add the cost of the furnishing (and/or FMV on the date your sold them if you're not sure of the cost) and the cost of the residence, including land. Divide each one by the total to arrive at the percentage of each.  Use that percentage times the selling price and selling expense to arrive at the figures for each sale.  The home and land will be your sale of your second home/vacation home and the personal items will be a separate sale which is not part of your vacation home.

As a reminder a loss on personal items is not allowed to offset other income on the tax return. A personal loss is ignored by the IRS.

[tomboy257]

Does it still need to be considered two sales if the sales contract states the home is sold furnished? I'm in the process of identifying those items I have receipts for and those items (glassware, dishes etc.) that I paid cash for or brought from my permanent residence. Also, there is no land involved as it is located in a land lease community.

[DianeW777 · Accepted solution]

Yes. It's one of those tax issues. It's important to separate the personal property (anything that is not real property in tax terms) from real property.  In the tax law there are only two kinds of property.  

1. Real Property (anything that is land, buildings and structural components)
2. Personal Property - Two Types
   1. Tangible - anything you can see, feel or touch
   2. Intangible - in and of itself it has no value but represents a value (a dollar bill or a stock certificate, etc)

The reason is simple.  Real property has special tax treatment rules and personal property income is taxed at the ordinary or regular tax rate. Do the best you can and document how you arrived at your costs.  The IRS will likely accept your reasoning if you don't have receipts.

@tomboy257

[Edited: 02/24/2022 | 9:38a PST]

[tomboy257]

Thanks for all your help.