Calculate cost basis?

Forum|Forum|1 year ago
December 21, 2024
2 replies
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In 1999, my wife was gifted a piece of land for $1 from her grandparents. I built a single family home on that property where we have lived since then. In 2014, we lost the home in a wildfire and our insurance company paid us to rebuild and I personally rebuilt the house. How do I calculate cost basis on home? Is the cost basis the amount the insurance company paid me to rebuild my house?

Mike9241

Level 15

basis comes from IRC code section 1033

(a)General rule
If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—
(1)Conversion into similar property
Into property similar or related in service or use to the property so converted, no gain shall be recognized.

(b)Basis of property acquired through involuntary conversion
(1)Conversions described in subsection (a)(1)
If the property was acquired as the result of a compulsory or involuntary conversion described in subsection (a)(1), the basis shall be the same as in the case of the property so converted—
(A)decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and
(B)increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made.

the basis for the land is the basis the grandparents had - a donee takes on the tax basis of the donor

since you rebuilt the house the rules above apply.

chuckjimAuthor

Level 2

ok, the property that was gifted to us is a piece of tribal trust property that dates back before the state was a state and is not governed by the state or the tribe and is not taxable land. My wife paid $1 love and? For the property to record it in our name with the tribe.
In turbo tax, I am not sure which boxes to click on as I didn’t buy my home, I built my home myself. I was paid $560,000 by the insurance company to rebuild my home and I spent about $450,000 to build it myself. If I click the boxes that lead me to calculate cost basis, and I click acquired property in a different way than purchasing it, it doesn’t allow me or it doesn’t calculate depreciation? I have thus far clicked purchased home for $450,000 and I have left all boxes blank for title fees, filing fees etc. I have listed cost basis of land at $1 as that is what my wife paid? Should I approach this differently?

chuckjimAuthor

Level 2

@chuckjim wrote:

We lost our home in 2014 due to a fire. We had insurance and rebuilt the home in 2015. This year(2024) we rented it on Airbnb and that is why we need to establish the cost basis of our home for depreciation to offset gains from rental.

But I think that is irrelevant if both the rental and the sale happened in 2024. I don't even think you can legally claim depreciation in this situation, but I could be wrong.

@Critter-3

Even if you could, this is what would happen:

You place the property in service as an AirBnB. Your basis for depreciation is the cost basis of the property, minus the value of the land (even though the land does not have a basis in your situation, it has a value). Since the basis is $450,000, let's say the land is $50,000. So the basis of deprecation is $400,000. Your depreciation is $1212 per month for each month the property is available for rental. That is an expense that decreases your taxable rental income on schedule E without decreasing your cash flow. You pay less tax on the rental income.

Then, on the capital gains calculation, even if you are covered by the $500,000 exclusion for married filing jointly, you must still pay depreciation recapture at your regular income tax rate. That causes you to pay more income tax on the sale of the property, that exactly balances and cancels out the tax you saved on the rental income.

However, if your net rental income is zero or negative, you generally can't take the loss against your other income. That means you might get no tax savings from depreciation AND have to pay income tax on the recapture. A net increase in your tax bill for no benefit.

In any case, you may want to consult a professional.

We still own our home. We didn’t sell it. We just started to rent it this year. We live in the house 4 months and rent it the other 8 months

Opus 17

Level 15

Your basis is what you paid to build the house plus your basis in the land. Because the land was a gift, your basis in the land is whatever the grandparents paid for it originally. This might be found in county records. If you don’t know what you paid to build the house, you can reconstruct or estimate as best you can. However, in case you are audited, the IRS is not required to award any basis that you can’t prove. (You can include the cost of materials and labor that you paid for, the cost of architect plans, building permits, inspections, utility hook ups, and other expenses associated with building the house, but you cannot claim anything for the value of your own labor, if you provided free labor to the project.) The fire and the insurance payout are ignored because they cancel each other out.