Possibly selling primary house this year. Is there any reason in the following circumstance to have an accurate basis?

[Zirpto]

Inherited 50% of house a couple decades ago, and inherited the other half interest about 15 years ago.  This is primary home.   So have owned the whole house for 15 years.  I know the appraised value for the first half, but an appraisal was not done for the second half, since it was not needed for the small estate with sole heir--just a title transfer.

As an example, the first half interest had a basis of about $40K and the second half interest would have likely had a basis of say $50K or so if an appraisal had been done at the time.   Current value of whole house is about $110K.  That would be a gain of about $20K if using fully-appraised basis from the 2 prior events.

I realize I could pay $200-300 to have it appraised retroactively, but since the gain would only be approx. $20K when fully appraised, is there any reason to do so?   Even if I only used the first half value of $40K and ignored the second half basis, the gain would be $70K.

Since this is preliminary at the moment, I don't know if I will get a 1099-S or not.  I'm hoping I can talk them into not submitting one.  I don't think they have to give submit one for a primary home with these value amounts, do they?

In summary, is there any need to pay for a back appraisal?  Am I likely to get a 1099-S?

Thanks.

[Carl]

Was this house your primary residence for "at least" 2 of the last 5 years you've owned it? When you sell it in 2019 (if you sell it) will it have been your primary residence for at least two of the last 5 years you would have owned it, counting backwards from the closing date of the sale? Your response will dictate my answer which will be what I believe will be best, legal and safest for your specific situation.

[Zirpto]

 yes, have lived here many years.

[Carl]

Then play it safe and use a basis that you can prove, which would be the cost basis of the entire property when you inherited the first half 15 years ago. Your "gain" will still be less than $250K and since you qualify for the "lived in 2 of last 5" years you owned it, you won't pay any tax on the gain.
If you're married and your spouse also lived in the house with you for at least two of the last five years you owned it, (with both names on the deed of course) then your first $500K of gain is tax exempt.
Now if the difference between the cost basis you can prove, and the cost basis you estimate, doesn't put your overall AGI in a higher tax bracket, I'd go with the total cost basis I can prove and leave it at that. Does this make sense to you? (it does to me, but that don't mean anything.)

[mesquitebean]

I'm not sure how the AGI figures in here with this value.   Doesn't the capital gains exemption occur before the AGI is calculated?    Or maybe you were speaking in general if a house was a higher value home.

[Carl]

I honestly don't know when the AGI is figured, be it before the exemption, or after. The reason I'm thinking before, is because you do have those situations of "unqualified use" where the deductible amount is figured to a percentage of the actual gain, even if that gain is less than the maximum amount.

[Opus 17 · Accepted solution]

If you did not live in the home as your main home for any period of time in 2009 or later, you have a period of "unqualified use" and some of your gain is taxable despite the exclusion.  Or, if you ever used part of the home for business (rental, home office) and took or could have taken depreciation, then part of your gain may be taxable.

However, barring those circumstances, if you qualify for the exclusion, the exclusion is larger than your gain under any scenario, and you would only need to report the sale if you get a 1099-S.  You would have to ask your closing agents whether issuing the 1099-S is common in your real estate market.  It may not be, especially for residential real estate. (not rentals, not commercial, etc.)

Note that if audited, the IRS only has to award any basis you can prove.  But if you have an estimate of the FMV from other resources (Zillow, etc.) you might take a chance on using that as your basis, and only paying for the retroactive appraisal if you are audited.  You don't send any appraisals or proof of basis with your tax return, even if you report the sale on schedule D.  But keep copies of all your records for at least 6 years after the sale.