House sale rules before Section 121 exclusion

[DMICPA]

Years ago, when a home was sold at a gain, the gain was "rolled" into the cost of the new home and there was no tax at this time.
Later, the law changed and the previous method was replaced with the Section 121 exclusion and remains so today.

Have a client (MFJ) that purchased a home many years ago and probably rolled the gain from the prior sale into the current home but the client no longer has the tax returns from that purchase and sale year and therefore the cost basis could be different than what was actually paid. Client has no clue as to this and all old records have been destroyed due to natural disaster or tossed out. Client is going to sell the Home this year.

If the 121 exclusion covers any gain ($500,000) then it makes no difference. Otherwise I think I will use what the purchase price was as the roll over event occurred so long ago not even the tax authorities would have a record.

Maybe when Section 121 was signed into law, the deferred gain was taken out of the equation.

[ATSMAN]

Last I checked Sec 121 did not make any adjustment if the current home was purchased with gains rolled over prior to Sec. 121.

I have had only one client that I can recall who had more than $500K gain because his basis was so low and the property was on a street where MGM was developing a casino and they paid dearly to get hold of the lots near the casino.

[TaxGuyBill]

If the 121 exclusion covers any gain ($500,000) then it makes no difference. Otherwise I think I will use what the purchase price was as the roll over event occurred so long ago not even the tax authorities would have a record..

If the sale price is less than the exclusion, you are right, it doesn't really matter what you put, as it would all be excluded anyways.

But if the sale price is more than that, you are required to use a reasonable amount for the "Basis". You can't use a Basis amount that you think is wrong just because you think the IRS won't catch you.

[DMICPA]

I just found that if you postponed the gain from the sale of your main Home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. So, if the replacement home was acquired after May 7, 1997, the basis does not get reduced by the deferred gain is the way I read it. The Purchase price would be the starting point and improvements would be additions to the cost.

[TaxGuyBill]

That is correct. That is the date the 'rollover' method stopped to defer the gain and the $250,000/$500,000 exclusion started.

However, your original post indicated that you thought the gain from the old home was rolled into the new home. If there was a rollover to defer the gain, it happened before that date, and you need to find out amount of deferred gain to reduce the Basis of the new home. If it happened after that date, your original assumption was wrong and there was no rollover. Any gain from the previous home use the $250,000/$500,000 exclusion from §121.

[Lion]

Town clerk's office. Mortgage company. Realtor's office. Deed in the safe deposit box. Tax return. Your client needs to recreate a reasonable basis. You can direct him, but the number is not on your ceiling.