Old house, new gain

[Possi]

My new client just sold a house. His mother gave it to him in 1997. It cost her $4000.00 way back in the long-ago.
A room was added on while she owned it, but there are no records. Of course other things were done, but no records...
Since it was given to client, he has just maintained it and has not lived there or rented it out at all. He just goes there and works on it. They have utilities and regular expenses for it.
He sold it in Sept '06 for 73,500.
Am I correct to say his only basis is 4000?
thanks,
~poss

[Roland Slugg]

Add that room addition

Dear Possi

Well, it's $4,000 plus the cost of that room addition plus the cost of other capitalizable additions, improvements or betterments ... if any.

[jainen]

little-known loophole

Don't forget that $4000 "way back in the long-ago" was worth a whole lot more than $4000 today. For example, if the original purchase was in 1965, cumulative inflation has been 1200% since then so in 2006 dollars that's a basis of $48000.

This is a little-known loophole in capital gains calculations, but you can use my post as authority for it.

[BOB W]

!!!!

Sticky, Sticky, Sticky

[OldJack]

Don't forget that $4000 "way back in the long-ago" was worth a whole lot more than $4000 today. For example, if the original purchase was in 1965, cumulative inflation has been 1200% since then so in 2006 dollars that's a basis of $48000.

This is a little-known loophole in capital gains calculations, but you can use my post as authority for it.

Wait a minute Jainen!!! I guess I have been doing things wrong. It sounds like there was a completed gift way back in 1997 (last year to me) and inflation since then or before has nothing to do with cost basis. The last I knew cost was cost and the basis here would be cost unless there is some step-up to fair market value not indicated in post.

[sea-tax]

I think Jainen is interjecting a little sarcasm or funny to the post.

[jainen]

you have to convert it

>>cost was cost<<

Suppose the gift was in Canadian dollars--you'd have to convert it, right? Same thing here--if it was in 1965 dollars, you have to convert it.

[WhiteOleander]

>>cost was cost<<

Suppose the gift was in Canadian dollars--you'd have to convert it, right? Same thing here--if it was in 1965 dollars, you have to convert it.

I want to live in his world. It sounds really great.

LOL

[OldJack]

>>cost was cost<<

Suppose the gift was in Canadian dollars--you'd have to convert it, right? Same thing here--if it was in 1965 dollars, you have to convert it.

Oh... of course... sounds reasonable to me.

Why is it I'm the last one to know these things?

[cpadan]

Oh... of course... sounds reasonable to me.

Why is it I'm the last one to know these things?

You haven't heard that the IRS has adopted Constant Dollar Accounting?

[Bees Knees]

Actually that is the theory behind the idea that capital gains based upon inflation should not be taxed.

For example, you buy something in 1965 for $4,000. The only appreciation is due to inflation. That $4,000 represents $48,000 in today’s dollars. Your buying power never changes, due to inflation, and so you never increase your ability to purchase anything with that $4,000 investment. Even so, when it is sold today for $48,000, you have to pay capital gains tax on something that really did not increase your buying power.

The tax code is full of taxing you simply keeping up with inflation.

[Unregistered]

Actually that is the theory behind the idea that capital gains based upon inflation should not be taxed.

For example, you buy something in 1965 for $4,000. The only appreciation is due to inflation. That $4,000 represents $48,000 in today’s dollars. Your buying power never changes, due to inflation, and so you never increase your ability to purchase anything with that $4,000 investment. Even so, when it is sold today for $48,000, you have to pay capital gains tax on something that really did not increase your buying power.

The tax code is full of taxing you simply keeping up with inflation.

It's a great "theory", and the reason we're all employed.

[jainen]

send the money now!

>>capital gains based upon inflation should not be taxed<<

Why should capital gains tax on real estate be determined by change in value of consumer goods? In the original post, what they bought "way back in the long-ago" for $4000 can NOT be purchased today for $48000--it costs $73,500! Obviously there was NO capital gain, just market inflation in that particular industry.

You should get my new book--"99 Tax Tips Your CPA Won't Tell You (because he would lose his license)." Members of this forum get a pre-publication discount if you send the money now!

[cpadan]

Actually that is the theory behind the idea that capital gains based upon inflation should not be taxed.

.

I am familar with that theory. When I was in college I represented our chapter of Beta Alpha Psi in a national essay constest, the topic was applying constant dollar accounting to GAAP.

[Bird Legs]

Send your money in now?

Where to? Mine is already in an envelope and sealed. Is the
mailing address: 1009 North Pole
Alaska 99999