All Forum Posts by: Whit Hill

To be clear, I think the cost basis he (and our Michigan tax man before him) have used was the purchase price of the house back in the mid-'90s. 

Re establishing a paper trail, I think we probably could reconstruct it as we personally know nearly all the workmen who did the work.

Thanks all. In answer to why not the 1031, you are right: as I understand it, we would have had to buy a like property here in Nashville -- around 425K -- which would have meant a hefty mortgage which I'm not sure we'd qualify for currently.  

Maybe it was a mistake not to try, but the situation is complicated (too much to go into here) and we just decided to pay the tax.

After we pay down some debt and pay the tax, we'll have maybe 60K that we can sink into a modest rental. There are lots of homes in the $120K range and I think we'll be able to get  small mortgage. Fingers xd.

I admit I'm totally confused by the cost basis thing and why our accountant here (who is also a real estate agent) didn't figure that in when we started going to him (the same year we turned out MI house into a rental).

Not sure what to do now, but maybe I should get a second opinion on things.

I'm pretty sure our tax accountant has been calculating depreciation all along. He too seemed surprised that a cost basis hadn't been calculated years ago. Wasn't that something he would have known to do?

If we were ever audited, what would be needed? Names of workers? Cancelled checks, etc.?

We went through a terrible flood here in Nashville in 2010 and lots of paoerwork was lost. We have lots of stuff on Quicken tho. Maybe that would count?

Thanks for your response. Helps us know what questions to ask our accountant.

My husband and I have just sold our longtime home in Michigan. We moved to Tennessee in 2008 and have been renting it out for the past 7 years.  Here are the basics: We bought it for 130K 20 years ago and just sold it for $425K. After the dust settles, we plan on buying a small rental here in TN. We researched the 1031 Exchange but didn't feel it would meet our needs. So we are planning for a hefty capital gains tax bill next year.

Our accountant has explained to us that in order to figure out what we owe in taxes, we need to figure out the cost basis for the Michigan house -- adding up all the major improvements we did while we lived there (roof, kitchen, two bathrooms, turning a garage into a studio, etc.)

He seemed to think that the IRS will NOT question us about these improvements or ask for proof, receipts, etc. -- that you can basically come up with a figure. Is this true? We certainly do not have any kind of accurate paper trail for all the stuff we did to that house over all those years. 

Obviously, we want the cost basis to be as high as possible, reflecting the work we did. How do others handle this situation? 

Is there any other aspect of mitigating the tax that we might have overlooked? THANKS! 

And thanks for the LLC advice. Obviously, we have a lot to learn...

Wow! Thanks for all the responses. Abhishek: on the whole, Ann Arbor has been great. Our house is right downtown, within walking distance to town and campus so we never had trouble finding good tenants. Had a mix of medical residents (best tenants ever) and grad students (also OK). But we are now realizing how out of step with the market we've been renting it for. Could have priced it higher, but opted for keeping the peace and holding on to responsible tenants. 

Thanks to those who mentioned the 101 Exchange. We've been trying to learn about this option.  My son (a budding RE investor who encouraged me to join this site) has been pushing for us to explore this option. My understanding, tho, is that we would have to reinvest the profit in a property that costs the same as we sell for. Is this accurate? 

Rookies that we are, when we first heard about the 1031, we thought we'd be able to take the profit from the sale (say $100K, just for argument) and then buy a house outright here in Nashville for $100K and be off to the races. But, as you all know, it's not that simple. As I understand it now, if we sell our Ann Arbor house for, say, $400K, then any Nashville house we buy would have to be $400K (putting the $100K down and getting a mortgage.) 

Big question: could we do the Exchange and instead buy TWO $200K houses? FOUR $100K houses? So complicated. 

I keep thinking it might just be best to pay the tax and be done with it. Sigh.

Yikes. This is my first post on BP tho I've been lurking about for a few weeks. Here's the quick rundown: 

My husband and I live in Nashville, TN. We also own a rental house in Ann Arbor, MI (the house we lived in for many years) and one in Bradenton, FL (a house we bought in '03 for my daughter to live in. She no longer lives there.) For a variety of reasons (mostly that we don't like being out of state landlords), we are ready to unload both houses. We are heading up to Michigan next week to prep that house for sale and will try and sell the FL house in the fall.

Our plan is to use the profit from the sales to buy a rental here in Nashville (or possibly join forces with someone to flip.) 

We have many questions about how to proceed, but wanted to start with this one:

We are about to lose our current health insurance and are looking for a new plan. Because we are both on track to earn a little less this year, we could qualify for a subsidy under the ACA. BUT, the profit from the Ann Arbor house will raise our income significantly for the year. If we were to form an LLC and put the profit in there, would that solve the problem?

More questions to come. THANKS! Whit