Capital improvement recordkeeping problem

[Tom in Seattle]

Prospective client/taxpayer has been referred and is the brother of an existing client for whom I have respect. TP purchased and improved investment real estate in the mid-80s. Now he is selling. TP has closing statements on the original purchase but does not have records to support $300K of capital improvements he made in the early years. His original accountant entered the scene after the capital improvements were made and set up depreciation schedules based on the original cost basis only. Capital improvements were never added. TP has tax returns dating back to 1998 only. TP does have "collateral evidence" such as photographs of the property before and after improvements. Prospective TP seems sincere and his description of the improvements he made is plausible.

I could amend open returns and use recalculated depreciation based on TP estimation of capital improvements. Then capital gain would be determined using recalculated basis.

Does TP stand any chance of his position holding up? Would any special disclosure need to be made, and if so, on what form? If this approach does not withstand IRS scrutiny, how severe are the penalties?

Thoughts and any direction are appreciated.

[Kram BergGold]

My policy

I do not accept new clients who sell property in the year they switch tax pros. I suggest you ex post facto adopt this policy. Either the previous tax pro was terrible or your client is .... Regardless, if you take this on what does it make you?

[S T]

What type of investment property?
Was it a Residential Rental, a Commercial Rental
What year were the Capital Improvements Made?
Seems like $300,000 in the mid 1980's was a total makeover-Renovation, that was a lot of money then.
Does t/p have any loan documents on the property or show how he paid for $300K of capital improvements over and above the purchase price?
Why did the prior accountant ignore any Capital Improvements made or why did the taxpayer not note it.
What happened to all of the records prior to 1998? and the taxpayer only has photographs? Do the photographs have date stamps? Before and After
I don't know - skeptic that I am - I don't think I would like to represent this client in an audit, without more documentation.

From Pub 534 (before 1987)- .See page 12-13 What Records Must Be Kept, Adequate Records, Loss of Records, etc to establish depreciable expenditures

Pub 946 for after 1987

Sandy

[origun]

Building permits?

Were any of the capital improvements ones that required building permits from the city or county? Where I live, I have access to the online County Assessor's records which list any improvements which required permits. Dollar figures are given as well as dates and contractors who did the work.