Question: We have a summer home in Williams that is currently for sale for $140,000. We purchased this summer home for $48,000 over 20 years ago and we have made improvements of $40,000, but we are missing many of the receipts for these improvements. We understand that because this summer home is not our principal residence that we are not eligible for any of the tax breaks, so we are trying to reduce the amount of capital gains taxes that we will have to pay when we sell this summer home but are not sure of the real estate capital gains laws. Can we claim on our tax return the entire $40,000 in improvements even though we are missing some of the receipts? Can we also claim on our tax return the closing costs we pay such as brokers’ commissions and title insurance when we sell our summer home?
Answer: In general, when you sell your summer home the amount of your taxable gain will be the approximate $140,000 sales price of the home less the approximate $88,000 tax basis of the home ($48,000 purchase price plus $40,000 in improvements), and less the closing costs such as broker’s commissions and title fees. You have the burden of proving to the I.R.S. your tax basis in the home, and the I.R.S. generally requires receipts. Therefore, you may not get credit in the basis calculation for the cost of those improvements for which you do not have receipts. The settlement sheet from the title company should show the amount of the closing costs.