What is my tax basis on a house that burned to the ground and was rebuilt?

[rcorona106]

I bought a house in 1992.  Quitclaimed it to my father in 2015.  The house burned down in 2019.  My father quitclaimed it back to me and my siblings shortly after the fire.  In 2021, the house reconstruction was completed.  The house was sold in 2023.

[DianeW777]

It depends, it will take some calculation. The quitclaim deed indicates a gift to the the recipient.  

If there was no insurance reimbursement for the house the basis will be for the siblings:

1. The original cost you paid for the house, plus any purchase expenses, plus any capital improvements paid for before the first quitclaim deed, plus any improvements made by your father, plus any expense used to reconstruct the house after the second quitclaim deed, plus any reconstruction before sale after the third quitclaim deed. 
2. Divide it by the number of siblings who owned it in the second quitclaim deed. This will be the cost basis for each sibling.

If there was insurance reimbursement and/or a causality loss deduction it will be a bit more complicated. Cost basis will be:

1. The original cost you paid for the house, plus any purchase costs, plus any capital improvements paid for before the first quitclaim deed, plus any capital improvements father made during his ownership, less any casualty or theft loss deductions (on a tax return) and insurance reimbursements, plus any restoration costs before and after the third quitclaim deed.
2. Divide it by the number of siblings who owned it in the second quitclaim deed. This will be the cost basis for each sibling.

These basis figures are necessary to determine the actual cost basis you must use at the time of sale.  A gift has different rules for cost basis depending on whether it is a loss or a gain on the sale.  See the IRS FAQ below:

• What is the basis of property received as a gift?

A gift tax return is required if the annual gift limit is exceeded for one individual (it can be doubled if a husband and wife each give a gift to the same person). If this applies you would need to see a tax professional about your next step.

• Gift Exclusion Amounts:
• 2015 - $14,000
• 2019 - $15,000
• 2021 - $15,000

[rcorona106]

Thanks for the reply.

100% of the insurance proceeds covered the cost of the reconstruction.  There were some improvements made to the house since it was bought in 1992 and before it burned down but no documentation supporting them is available. 

Might be easiest to just take the 1992 purchase price and divide by 4 to get the tax basis?

[AmyC]

Yes, the 1992 purchase price plus any improvements you can show. I find sometime people have a picture that shows the changes. Maybe you have a picture of a new room or fence in a Christmas or party picture. You might have neighbors that could give a statement. If not, you are correct, your basis from 1992 divided by 4.

[Opus 17]

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@rcorona106 wrote:

Thanks for the reply.

100% of the insurance proceeds covered the cost of the reconstruction.  There were some improvements made to the house since it was bought in 1992 and before it burned down but no documentation supporting them is available. 

Might be easiest to just take the 1992 purchase price and divide by 4 to get the tax basis?

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You need to figure the gain two ways.

1. Use the basis equal to the price in 1992 plus the cost of improvements and post-fire restoration that you can prove, minus any casualty loss tax deduction your father took on his 2019 tax return. (This deduction would have only been allowed if the loss was due to a federally declared disaster like a wildfire or severe storm.  You do not have to reduce the basis by the fire damage if your father did not take a tax deduction for the loss.)   If you sold the home for more than this adjusted basis, you have a gain.  Stop here, and figure your taxable capital gains.  If you have a loss when using this method, recalculate your situation in step 2. 

2. Use as your basis the fair market value of the property immediately after the fire, plus the cost of restoration.  (The fair market value after the fire was likely the value of the land minus the cost of cleanup.).  If you still have a loss, then the loss may be deductible.  If you have a gain using method 2 and a loss using method 1, then you have neither a gain nor a loss.

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

Losses on personal property are not deductible, but losses on investment property are deductible.  Siblings who lived in the house, or used it as a vacation home or second home, treat it as personal property.  If a sibling did not use the home for personal reasons and only retained ownership to make money when it was sold, then they can consider it investment property and deduct a loss.