What should I use as my cost basis? Inherited rental property...

[Ricky Stafford]

Parents built a house in the 80s and just built as they went - no record of what they paid. Parents deeded over property my sister and I in 2013. I renovated and started renting out 33% of the house in 2014. I have thus far not claimed any depreciation on this property but don't foresee ever selling it so that's not really an issue.

From what I've read, my cost basis is their cost basis which is the lesser of fair market value or cost + improvements. Since there's no way to know cost + improvements as they never kept a record, what do I do? I'm fine with with a super conservative estimate since something is obviously better than nothing, but don't even know where I should start?

[Paul Caputo]

@Ricky Stafford Wow that's a tricky one! Since they built it in the 80's bit by bit I'm guessing there's right around zero chance that their adjusted basis is higher than the FMV in 2013. So the FMV doesn't really matter but maybe you can use it to back up the reasonableness of what you figure out. You're going to have to estimate it in good faith and just go with that.

With the lack of records there's really no way for you, your parents or even the IRS to know what the actual cost basis is on the property. So there's really no way for you to get in trouble with the IRS on this unless your basis is deemed "unreasonable" so just be reasonable. 

I'd take @Michael Plaks advice and estimate based on historical averages. As long as you figure it out in a way that makes sense you should be fine.

One thing on the depreciation though, definitely do not amend your returns to take depreciation as thats a red flag and the improper way to adjust depreciation. File Form 3115 instead since it doesn't require amending, you can file it at any time and you'll get your catch-up depreciation credited to your taxpayer account within 30 days. Since you're only renting out 33% of the house this isn't going to be a big amount of depreciation anyway, but if you ever do sell it's much better to have taken it than not because there's recapture either way.