Best way to determine basis of a rental property conversion?

[Jamie S.]

I need help figuring out how to determine the basis for a rental property. I purchased and lived in the property for a number of years and did a lot of renovations. I also built a garage apartment that I am now renting in addition to the main residence so there are actually 2 rental units. From reading it looks like I can use the FMV at the time of conversion OR the purchase price plus the cost of improvements. I had an appraisal done a couple of years ago to refinance the place which was reasonably high but it was on the entire place.

It might take me days to go through the giant stack of receipts for all the improvements but I believe that I would get a higher basis this way even with my unpaid labor.  But it's alot of receipts (probably over 500) and a bit 'messy' with a chance I might mix some non-improvement purchases in.  Some contractors weren't great about writing detailed invoices so in some cases all I have is a large check written to 'roof guy'.

So.... question: is there alot of scrutiny from the IRS as to how you determine the basis? Would an appraisal from 2 years ago be ok or not considered accurate enough?  Is it better to have the highest basis possible to increase depreciation and decrease the amount of taxable gain at sale? Or is it better to use the lower value from the appraisal and minimize audit risk.  

I have receipts for most of the appliances and other fixtures (some of which are higher end so it's a substantial amount) and the roof and hvac. Is it better to separate out those fixtures and give a 10 year depreciation cycle?