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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

What Happens If I Don't Know My Cost Basis?

Dec 16, 2011

A reader asks the following question:

"How do you prove what you paid for a land asset that is subject to capital gain purchased long ago if no records exist? The land deed only shows the deed tax paid at the recorder's office, with no stated value."


Although the requirement for keeping records in most cases is three full years, this is one of those situations where you want to keep the closing statement on any land or property purchases until three years after the year of sale, and I would highly suggest keeping these records in your permanent file.

However, as in this case, many times these records are lost.

First, we must make sure that this property has not been inherited after the original purchase.  For example, if my father purchased 160 acres of land in 1960 for $50,000 and I inherited it in 2001, the new cost basis in that property is what it was worth on the date of my father's death, not what he paid for it in 1960. Therefore, if the reader has inherited this property, it does not matter what was paid for it.

Also, we need to verify that it was not partially inherited as in the case of a husband and wife, with one spouse inheriting the other's interest. Then, half would be based on original cost and the other based on the value at the time of death. (For a community property state, it would normally be like the first example on a full step-up in basis.)

If neither of these circumstances apply, we must try to find substantiation for what the original cost was. In this case, I would try to track down who recorded the deed at the courthouse and, if it is a title or escrow company or attorney, contact them; in many cases, they will have the original cost and closing statement. Also, in some cases, the county will have a record of that sales information -- it just would not be recorded on the deed. If your state had an excise tax due on sale for that year, you may be able to get the information from the state or county.  Every state and county is different.

If none of this works, then we normally try to use our best judgment on what the original cost of the property might be and realize that if this return gets audited, the cost may be disallowed.  Every case is different, and you need to review with your tax adviser.


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