Capital Gain - Client Wants to Add to Basis for Previous Years

[Hoosier]

MFJ Client has rental property. This is the third year I've prepared this client's 1040.

He sold one of his rental houses in 2020 (was purchased in 2008). Here's the capital gain calculation:

Sold - $130,000
Closing Costs - $3,000
Basis - $57,500
Accumulated Depreciation - $27,000

Capital Gain - $96,500

Client is telling me that he has a pole barn that was built on the property several years ago that was never reported on his tax returns. Said he might even have a few other costs that never made it to those returns.

So the questions are: How do I handle this? Do I allow the client to add to the basis? Do I insist on documentation (invoices, etc.) showing the additional costs?

Past copies of tax returns do not exist so cannot see if these costs were expensed in the year of purchase or if they were ever included on those tax returns' depreciations schedule.

He didn't bring up the pole barn or other costs until I computed the capital gain and discussed it with him before finishing up the 1040.

Note: Basis is computed per fixed asset schedule from previous accountant less last three year's depreciation. No new depreciable items for this property since I've prepared the returns.

[ATSMAN]

Request a complete transcript for the years in question if he does not have prior year tax returns. The first year you prepared his tax return did you see a depreciation schedule? If not how did you prepare the return, how did you figure out depreciable basis etc?

[TaxGuyBill]

Client is telling me that he has a pole barn that was built on the property several years ago that was never reported on his tax returns. Said he might even have a few other costs that never made it to those returns.

Do I allow the client to add to the basis? Do I insist on documentation (invoices, etc.) showing the additional costs?

Past copies of tax returns do not exist so cannot see if these costs were expensed in the year of purchase or if they were ever included on those tax returns' depreciations schedule..

I would fist ask him why he didn't report major expenses for his rental property.

You need to believe him and the amount that he tells you. That might include documentation. If there were major depreciable items that were not reported, you also need to reduce the Basis by the depreciation that could have been taken. You may consider Form 3115 to 'catch up' on the missed depreciation.

As was pointed out above, at least some of the tax returns and/or tax transcripts are available from the IRS.

[Gretel]

I also would inquire who used the pole barn. I have a client that just purchased a rental property but the additional storage building is used by them and not part of the rental property.

[ATSMAN]

I also would inquire who used the pole barn. I have a client that just purchased a rental property but the additional storage building is used by them and not part of the rental property.

I have rental clients with barns and storage sheds etc. that are mixed used by the landlord and the tenants. It is very difficult to get a straight accounting from them because the usage varies sometimes weekly. One fellow grows sod in the back yard, and may store some excess products or machinery for a bit and then it is no longer used.