Home Cost Basis Documentation Not Available

[33Degrees]

What do you do if you have legitimate expenses from remodels, pool additions and other improvements but don't have any paperwork?

My 80 year old mother-in-law lived in her home for nearly 50 years, the purchase was for $140K and just sold for $1M. She is single and does qualify for the $250K exemption and closing costs etc., however, she is looking at a substantial gain.

Over the years, about $350K was put into the home through roofs, remodels, pools, massive landscape projects etc. however, over the years, she did not keep good records and most of what she had was lost in a flood many years ago.

There are photos and no question that work was put into the property.

Can we safely increase the cost basis?

What happens if we are ever challenged and we don't have all the receipts and paperwork for about 1/2 of the work?

[Bsch4477]

All you can do is the best you can to justify whatever improvements she made and be prepared to defend them if audited. 

[NCperson]

@33Degrees also, given how long she lived in the home., it is only the last capital improvement of the same type that can be added to the cost basis. 

Let's say she replaced the roof three times - then it's only the most recent replacement that is added to the cost basis.  

[33Degrees]

In most cases, what happens if the cost basis is questioned and some are not allowed? I understand we would have to pay the tax and interest, is this a situation where you would likely also catch a penalty? Again, these are all legit expenses with most receipts and original paperwork no longer available.

Also, is it better to try to explain all the improvements when the return is filed, or keep the detail and provide only if questioned?

Thank you

[Bsch4477]

If expenses are disallowed she would pay the tax owed plus interest. There is no point in sending an explanation with the return.