Calculate cost basis?

Forum|Forum|1 year ago
December 21, 2024
2 replies
0 views

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?

M-MTax

Level 15

@chuckjim

My mistake, I thought you were trying to calculate the cost basis so you could sell and determine your capital gains.

@M-MTax

I think we have a different understanding of what the $450,000 was. But we need to clarify.

@chuckjim

How much did you pay to originally build the house? That is your cost basis. If you paid $450,000 originally, and then there was a fire, you received $560,000, and you rebuilt the house, then the fire and the insurance payout are ignored and your cost basis is still $450,000. However, if you paid something different to originally build the house, then you received a $560,000 insurance settlement but only paid $450,000 to rebuild the house, then the calculation becomes much more complicated, and we need to be completely clear on the details.

And finally, whatever your cost basis is, you must subtract something for the value of the land, because land doesn’t depreciate. Even though you have no cost basis in the land because of how it was acquired, you must subtract the value of the land from your depreciation basis when you list the property as a rental.

How much did you pay to originally build the house?

You mean how much did @chuckjim pay to build the original house, right? The house that was destroyed by the fire? That would be the cost basis and the basis for depreciation. The $450,000 received from the insurance company is a nonrecognition event so no tax would be due on the difference between the $450,000 payout and the basis of the house that was destroyed by fire.

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.