Fourth quarter is when property owners and their accountants start looking at the year's transactions and at what is planned for next year. For anyone holding real estate in Greater Boston for a long period, the conversation eventually reaches the same question: what is the cost basis. It is a simple question with a frequently difficult answer, and the answer determines how much of a sale is taxable. General principles follow; the specifics belong with your tax professional.
Basis Is Not Just What You Paid
Cost basis starts with the purchase price and is adjusted over time. Capital improvements increase it. How that works is explained in how capital improvements affect your property's tax basis and why documentation matters. Certain deductions and credits reduce it. For property that has been held twenty or thirty years in an appreciating market, the difference between the original purchase price and the properly adjusted basis can be substantial, and every dollar of documented improvement is a dollar that is not taxed as gain.
The Documentation Problem
Most owners did not keep receipts for a kitchen renovation completed in 1998. Contractors have closed. Bank records have aged out. The improvements are visibly present in the house, but the paper trail supporting them is gone. This is the single most common obstacle in basis calculations on long-held property, and it costs owners real money because undocumented improvements are difficult to claim. What to keep and why is listed in cost basis and the records to keep before you ever sell a Greater Boston property.
When a Retrospective Appraisal Is the Right Tool
Certain situations require establishing a value as of a past date rather than reconstructing a basis from receipts. Property inherited at some point in the past takes a basis tied to the date-of-death value, and if no appraisal was obtained at the time, one can be prepared retrospectively. That scenario is covered in the capital gains question and when selling a long-held Greater Boston home requires a retrospective appraisal. Property converted from personal use to rental takes a basis determined at conversion. Property received in a divorce may need a value tied to the transfer. In each case, the appraiser reconstructs the market as of that date using sales that closed around it.
What to Gather Now
Closing documents from the original purchase. Any prior appraisal, however old. Permits for work performed. Photographs before and after major projects. Contractor invoices and canceled checks where they survive. Insurance records that describe the property. Assessor field cards from earlier years. None of these individually solves a basis question, but together they form a record, and the time to assemble it is before an accountant asks.
Why Fall Is the Right Time
If a sale is contemplated for next year, or if a retrospective valuation will be needed, starting now means the work is finished before the filing season and before the appraiser's calendar fills with year-end estate and gift assignments. It also gives your accountant time to actually use the information rather than receive it in April.
Capital gains outcomes are decided by documentation, and documentation is easiest to assemble before anyone needs it. We prepare retrospective and cost basis valuations across Eastern Massachusetts, including Cambridge and the surrounding cities and towns. Talk to your tax professional about what your situation requires, and get the valuation work started while there is still time to do it properly.
To learn how Aladdin Appraisal serves homeowners, attorneys, realtors, CPAs, and investors across Greater Boston, visit our full appraisal services page.
