Taxes on selling a house - unusual situation

[lesmalheurs]

Hi everyone,

I sold a house last year. It was a foreign property, but from what I noticed that does not change much from tax code perspective. The house was built by myself. I dealt with individual contracting firms separately to build things at different stages. In most cases I don't have papers confirming how much I paid these contractors. All I have is my own spreadsheet, which I have kept until now. I do own documents for the original land sale, as well as the final sale of the house, but I will have a huge problem trying to document anything in between. Obviously, I want to pay taxes only on the actual gains.

How am I supposed to document capital gains on this house? Should I be worried when filing taxes?

I would appreciate any help here :)

Edit: I'm talking about IRS here. I live in US.

[RetiredAt63]

The only help I can offer is to suggest you identify what country you live in and pay taxes to.  Tax laws are so variable.  Maybe go to the taxes section in the forums?

[lesmalheurs]

I live in US. I'm talking about paying taxes to IRS.

[bacchi]

You don't have any other documentation? Canceled checks, bank statements, etc.? Even pulled permits are good to keep around.

Personally, I'd use your current written documentation -- your spreadsheet -- and calculate cap gains that way. The chances of your return being questioned are low and you're not commuting fraud. You just don't have enough documentation.

Ultimately, you should ask a professional.

[lhamo]

You will need to do the best you can to recreate the paper trail of how you paid for the supplies and the work done.  Even if that is just going through your old bank statements and documenting which transfers or withdrawals were for what stage of the work.

Was this your primary residence at any point?  If so you may still qualify for the capital gains exclusion on the sale ($250k for you, another $250k if it was also a primary residence for your spouse).

I would say estimate conservatively and pay a bit more in tax if necessary to avoid an audit.  We declared a very large capital gain on the sale of an overseas primary residence in 2017 -- paid over $200k in federal taxes, which was painful, but so far have had no signs of an audit.

PS:  Edited to add that I had receipts or bank transfer information for all the expenses I claimed against our home sale profits.  There were a few things I had listed in a spreadsheet that I could not find receipts for -- I chose not to claim those amounts and just go with what I had hard documentation for.  It would have been worse to be audited and have things challenged/have to pay taxes and penalties on relatively small amounts rather than just forgoing a minor tax increase.

[lesmalheurs]

You don't have any other documentation? Canceled checks, bank statements, etc.? Even pulled permits are good to keep around.

Personally, I'd use your current written documentation -- your spreadsheet -- and calculate cap gains that way. The chances of your return being questioned are low and you're not commuting fraud. You just don't have enough documentation.

Ultimately, you should ask a professional.

It was many years ago, so I don't really have much documentation left. Even if I have some, most of it is missing. I didn't think about bank statements. I will look into that.

[lesmalheurs]

You will need to do the best you can to recreate the paper trail of how you paid for the supplies and the work done.  Even if that is just going through your old bank statements and documenting which transfers or withdrawals were for what stage of the work.

Was this your primary residence at any point?  If so you may still qualify for the capital gains exclusion on the sale ($250k for you, another $250k if it was also a primary residence for your spouse).

I would say estimate conservatively and pay a bit more in tax if necessary to avoid an audit.  We declared a very large capital gain on the sale of an overseas primary residence in 2017 -- paid over $200k in federal taxes, which was painful, but so far have had no signs of an audit.

PS:  Edited to add that I had receipts or bank transfer information for all the expenses I claimed against our home sale profits.  There were a few things I had listed in a spreadsheet that I could not find receipts for -- I chose not to claim those amounts and just go with what I had hard documentation for.  It would have been worse to be audited and have things challenged/have to pay taxes and penalties on relatively small amounts rather than just forgoing a minor tax increase.

Unfortunately, the house never was our primary residence.

How did you deal with currency exchange rates? Did you have to look up what the rate was at the time expense was made to convert it back to dollars? Does IRS provide any reference rates?

I definitely need to find a professional to work on this.

[lhamo]

For currency rates I used the rates posted on xe.com on the date of the transaction.

Good luck finding someone who knows what they are doing. After interviewing 3 accountants I decided just to go ahead and do all the calculations myself as they seemed less informed than I was. YMMV.

[Goldielocks]

You can also try to find out the typical cost of building a house of size X, in your location, at the time you built it, and use it as a backup comparison to your spreadsheet.

The point is that you need to have reasonable, "typical" numbers, or numbers that are backed up with documentation.  It is hard for the IRS to claim that an existing structure cost "$0" to build, in the face of no obvious effort to commit fraud, but if you paid more than typical it would be easy for them to state that the structure should have only cost $1k in 1988, not $100k, and deny it without backup.

[lesmalheurs]

Can something like this trigger an audit? What would they request?

[lhamo]

Yes, it could trigger an audit.

Look at the IRS publication on property sales -- my recollection is it says explicitly that you must have documentation for the costs you claim, preferably original receipts.

[Case]

Hi everyone,

I sold a house last year. It was a foreign property, but from what I noticed that does not change much from tax code perspective. The house was built by myself. I dealt with individual contracting firms separately to build things at different stages. In most cases I don't have papers confirming how much I paid these contractors. All I have is my own spreadsheet, which I have kept until now. I do own documents for the original land sale, as well as the final sale of the house, but I will have a huge problem trying to document anything in between. Obviously, I want to pay taxes only on the actual gains.

How am I supposed to document capital gains on this house? Should I be worried when filing taxes?

I would appreciate any help here :)

Edit: I'm talking about IRS here. I live in US.

To be honest, your story sounds suspicious.  Not having documentation on most of the expenses on building a house, which is typically a pretty large expense... of all things, these sorts of things require holding onto receipts.

Contact the contractors, ask for copies of receipts.  Get documentation, since you don't have it.  If you wrote checks, get copies of the checks.  Get documentation just in case you get audited.

[lesmalheurs]

To be honest, your story sounds suspicious.  Not having documentation on most of the expenses on building a house, which is typically a pretty large expense... of all things, these sorts of things require holding onto receipts.

Contact the contractors, ask for copies of receipts.  Get documentation, since you don't have it.  If you wrote checks, get copies of the checks.  Get documentation just in case you get audited.

I think you're looking at it from the perspective of how these things are done in US, which isn't the case here. Anyways, you're right I need to get as much documentation as possible, but it's not going to be easy.

[Car Jack]

Your spread sheet sets your basis.  Your foreign taxes paid get documented.  Your sale price is...well...your sales price.  None of that should be complicated.

If you are not audited, you need no proof whatsoever.  Since you're voluntarily telling the IRS that you had income, are reporting it and paying taxes, you are not going to be the target of an audit.