Home Cost basis for home built with cash and no records

[OHBR549]

I am doing my (widowed) mother's taxes. In 2021, I sold her home while she is in memory care of assisted living facility. Over 30 years ago, my parents bought land and built a home with cash and there are no records for me to determine the initial cost basis. I put all proceeds in her bank account. Will she be taxed on the entire amount of those proceeds? Or how do I determine a cost basis?

[HelenC12]

No, she won't be taxed on the entire amount if she meets the requirements below.

She won't pay taxes on the first $250,000 (also known as a gain) she makes from the sale of her home. If she's Married Filing Jointly, she won't pay taxes on the first $500,000.

That income is free and clear as long as:

• She owned the home
• It was her main home for two years or more within the five years leading up to the sale.

If the sales proceeds were less than $250,000 ($500,000), you don't have to worry about a basis if she meets the requirements above. 

• Otherwise, check with her county or treasurer. They may have records as to the value of the property when it was built (occupancy permit) and any improvements that permits were applied for. 

[Opus 17]

The IRS does not have to award any cost basis your mother can't prove with reliable records.

Assuming your father died before your mother, she inherited his half of the home with a stepped-up basis equal to half the fair market value at the time.  You can also prove the amount they paid for the land from county records.  You may be able to prove the cost of home improvements made recently.

For example, if your father died in 2015 and the home was worth $200,000 at that time, the cost basis you can prove is $100,000.  If the land was originally bought for $5,000, that increases the cost basis you can prove to $102,500.  And if she replaced the furnace in 2017 for $4000, now you can prove a cost basis of $106,500.

Note that if the home is in a community property state, your mother inherited a stepped up basis equal to 100% the FMV when your father died, not just half the FMV.

The real estate value on the date your father died can be established by a qualified real estate appraiser.

If your parents divorced and your mother paid out a sum to buy out your father's share (or there was an adjustment in how assets were divided that did the same thing) then that can be used as the cost basis.

Then, as long as your mother was using the home as her main home, the first $250,000 of her capital gains are tax-free.  If your father died less than 2 years before the sale, she can include his $250,000 exclusion for a total exclusion of $500,000. 

https://www.irs.gov/pub/irs-pdf/p523.pdf

[Opus 17]

Let me add something about memory care to help you and your mother out.

If a person is in assisted living, only nursing services are deductible medical expenses.  Nursing services don't have to be provided by a nurse, but they have to be the kind of services that nurses perform (like dispensing medication, assistance with dressing, eating, toileting, and so on).  The facility would have to provide a breakdown for you.  Costs for room and board, laundry, and other things are not deductible. 

However, the entire cost can be deductible if your mother meets 3 tests.

1. Your mother is chronically ill with a disease lasting at least a year or expected to lead to death.

2. Your mother requires assistance with 2 or more activities of daily living (ADLs are eating, bathing, toileting, transferring, dressing, and managing continence) OR your mother requires supervision to prevent her from becoming a danger to herself or others.

3. The care is provided according to a written care plan that was developed by a qualified medical person or social worker and is updated at least once a year.

Depending on your mother's condition, she might meet the tests today, or maybe not now but eventually.  The requirement for a written care plan is what will trip up most people.  If your mother's condition meets the test and you get a written care plan, she can deduct the entire cost of her assisted living facility as a medical expense.

Also lastly, if you don't have a power of attorney, you should get one if she is still competent to give you one.  And you will need the POA to e-file her tax return, unless you are just helping to prepare it and she is competent to file it.