How to determine cost basis for a custom home built 35 years ago for taxes?

You're definitely on the right track wanting to establish a reasonable cost basis! Without receipts, you'll need to reconstruct the basis as best you can using available evidence. For homes built in the late 1980s, there are several approaches you can take: Contact your local building department - they might have permit information that includes estimated construction costs from when the house was built. This can provide an official record to support your basis calculation. Try reaching out to local builders who were active in that time period - they might be able to provide estimates of what similar homes cost to build in your area in the late 80s. Look for regional construction cost indexes from that era - organizations like R.S. Means publish historical construction cost data. Your local library might have archives of these publications. The IRS allows taxpayers to use reasonable reconstruction methods when records aren't available. Document your research methodology thoroughly to show how you arrived at your figure. Also, don't forget to include all eligible improvements made over the 35+ years - additions, new roof, HVAC replacements, etc. can all be added to the basis even if you don't have exact figures for the original construction.

After struggling with a similar situation for my dad's property, I found an incredible tool at https://taxr.ai that saved us thousands in unnecessary capital gains taxes. It helped us establish a legitimate cost basis for his 1970s home with almost no documentation. The system analyzed regional construction data from when his house was built and generated a defensible cost basis calculation that the IRS accepted. It also helped identify numerous home improvements over the decades that we hadn't considered as basis adjustments (like the septic system replacement and electrical panel upgrades). The interface walks you through everything step-by-step and creates documentation that shows exactly how the basis was calculated following IRS guidelines. Might be worth checking out for your situation.

I was really skeptical about taxr.ai at first (seemed too convenient), but I gave it a try for my grandmother's home sale last year. Her house was built in 1975 and we had zero documentation. The system actually worked amazingly well - it pulled historical building cost data specific to her county and created a detailed report showing median construction costs for her home type in that exact year. What impressed me most was how it factored in all the improvements over the years - even without receipts, it helped establish reasonable estimates for the roof replacement, bathroom remodels, etc. based on historical cost data. We ended up establishing a basis that was about $380k higher than what we would have guessed, which saved her over $57k in capital gains tax! The report it generated was incredibly detailed and professional. Made the whole process of defending our basis calculation to our accountant super straightforward.

If you're still struggling with the IRS after trying to establish the cost basis, I'd recommend https://claimyr.com - they helped me actually get through to a human at the IRS when I was dealing with a similar capital gains issue from selling my parents' long-held property. Was on hold with the IRS for literally 3+ hours multiple days before finding them. They got me connected to an actual IRS agent in less than 20 minutes who helped clarify exactly what documentation would be sufficient for our situation. They have a demo video showing how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that we could use county records, comparative construction costs from that era, and even photos showing the condition/features of the home when built to support our basis calculation. Honestly saved me days of frustration.

I take back everything I said about Claimyr! After struggling for weeks trying to reach the IRS about cost basis documentation requirements, I gave in and tried the service yesterday. Within 17 minutes I was talking to an actual IRS representative who explained exactly what would be acceptable for establishing cost basis on an older home. The agent confirmed that without original construction receipts, we could use: 1. County building permits 2. Property tax assessment records from when the home was new 3. Local real estate publications from that era showing typical construction costs 4. Photographs and descriptions of the original home to establish quality level She even suggested contacting the original builder (if still in business) as they might have archived records of typical construction costs from the 1980s. This single phone call saved me countless hours of research and uncertainty. Completely worth it!

Another option nobody's mentioned - check with your homeowner's insurance company. When my parents sold their longtime home, their insurance agent was able to pull historical records showing the replacement cost valuations over the years. The initial policy from when the house was built had a replacement cost estimate that was accepted as a reasonable approximation of the original construction cost. Also, if your aunt/uncle ever refinanced the home, the appraisal reports might contain useful information about the structure's value separate from the land.

Something else to consider - the IRS has a "safe harbor" approach where if you've owned the home for many decades and truly can't reconstruct the original cost, they sometimes allow approximating the original basis as a percentage of the sales price. This isn't officially published guidance, but I've seen it applied in audits. You'd need a good tax professional familiar with real estate to help navigate this approach though.

One more avenue worth exploring - check with your local historical society or library archives. They sometimes maintain records of construction costs and building permits from decades past. Our local historical society had newspaper clippings from the 1980s that included advertisements from local builders listing their typical construction costs per square foot. Also, if your aunt and uncle used a specific contractor or builder, try searching for that company online or in old phone directories. Even if the original owner has passed away, family members sometimes maintain business records that could help establish what homes of that size and quality cost to build in 1988. Don't forget to factor in site preparation costs too - if the lot required significant grading, septic installation, well drilling, or utility connections, these can add substantially to your basis. Your local utility companies might have records of when services were first connected to the property. The key is creating a paper trail that shows you made reasonable efforts to reconstruct the basis using available evidence. The IRS is generally understanding when taxpayers can demonstrate they've exhausted reasonable methods to locate original documentation.

As someone who recently went through this exact process with my parents' 1985 home sale, I wanted to share a few additional resources that really helped us establish a solid cost basis: The Bureau of Labor Statistics has historical Consumer Price Index data that can help you adjust 1988 construction costs to current dollars, which is useful for validating your estimates. You can find construction cost multipliers going back decades. Also check if your state has a Department of Commerce or Economic Development office - many maintain historical construction cost surveys from the 1980s that were used for economic planning. These can provide regional averages for residential construction costs per square foot. One thing that saved us thousands was documenting ALL the capital improvements over the years, even small ones. That new water heater in 1995, the driveway repaving in 2001, fence installation, deck additions - they all count toward increasing your basis. Create a timeline of every improvement you can remember, even with rough estimates. The key is showing the IRS you made a good faith effort to reconstruct the basis using multiple credible sources. Document everything you tried, even if some sources didn't pan out. This demonstrates thoroughness and reasonableness in your approach.

I've been helping clients with similar situations for years as a tax preparer, and you're absolutely on the right track with all these suggestions. One additional resource that's often overlooked is contacting the original mortgage lender if your aunt and uncle still have their loan documents from 1988. The original mortgage file often contains the construction loan documentation, which would show the actual disbursements made during construction. Even if the original lender was sold or merged, the loan files are typically transferred and archived. This could provide the most accurate construction cost documentation you'll find. Also, don't forget about the $250K/$500K capital gains exclusion for primary residences if they lived in the home as their main residence for at least 2 of the last 5 years before the sale. At their age, they likely qualify for this exclusion which could significantly reduce their tax liability regardless of the cost basis calculation. For the "reasonable effort" standard, the IRS generally looks for 3-4 different types of documentation attempts. Your plan to check county records, insurance files, and historical society records puts you in good shape. Adding the mortgage lender search and BLS data validation would give you a very strong foundation that shows thorough due diligence.

Here's another approach that worked well for my neighbor's similar situation - try contacting local real estate agents who were active in your area during the late 1980s. Many experienced agents keep detailed market records and may have sold comparable homes during that construction period. I'd also suggest checking with your local permits office for any inspection records from the original construction. Sometimes these files contain notes about materials used, square footage verified, or even contractor estimates that were submitted with the permit applications. One often-overlooked source is the local newspaper archives from 1988-1989. Many newspapers published "new construction" or "building permit" sections that listed recent builds with estimated values. Your local library likely has these archives on microfiche or digitized. Finally, if your aunt and uncle have any old photo albums showing the home under construction or newly completed, these can help establish the quality of materials and finishes used, which supports your cost estimates. The IRS accepts photographic evidence as supporting documentation when combined with other reasonable reconstruction methods. Document every source you check, even if it doesn't yield results. This shows the IRS you made extensive good faith efforts to reconstruct the basis using all available means.

One additional resource that might be incredibly valuable is checking with your state's Department of Revenue or Property Tax Division. Many states maintain historical property assessment data that goes back decades, including the original assessed values when homes were first constructed. When I helped my parents with a similar situation for their 1983 home, we discovered that their state's property tax database had the original assessed value from when the home was completed. While assessed values aren't always equal to construction costs, they provide an official government estimate of the home's value at that time, which the IRS generally considers credible supporting documentation. You can often access this information online now, or by calling the state revenue department directly. They may also have records showing when major improvements were made that triggered reassessments over the years. Also consider reaching out to local building supply companies that were operating in the late 1980s. Some of the larger lumber yards or home improvement stores keep historical pricing records and might be able to provide you with material cost estimates from that era to help validate your construction cost calculations. The combination of official state assessment records plus historical material costs could give you a very solid foundation for your cost basis reconstruction that would be difficult for the IRS to challenge.

One thing I haven't seen mentioned yet that could be really helpful is checking with your state's archives or records department. Many states maintain construction industry reports and housing cost surveys from the 1980s that were created for economic development purposes. I recently helped my grandfather with a similar situation for his 1986 home, and we found that our state's Department of Commerce had published annual residential construction cost reports throughout the 1980s. These reports included average costs per square foot broken down by region, home type, and quality level - exactly what we needed to establish a defensible basis calculation. You might also want to check if any local universities have construction management or real estate programs. Sometimes their libraries maintain historical industry publications and cost data that could support your estimates. The professors in these departments can also be great resources since many have been in the field for decades and remember what construction costs were like in different eras. Another angle to consider is contacting your local Chamber of Commerce. They often keep records of major construction projects and building permits from past decades, especially for custom homes that were significant investments in the community at the time. All of this documentation helps create what the IRS calls a "reasonable reconstruction" of your basis - the key is showing you used multiple credible sources and applied a consistent methodology.

One more resource that's been invaluable in my experience is checking with your local mortgage brokers or real estate attorneys who were practicing in the late 1980s. They often maintained files with typical construction loan amounts and appraisal values from that era. I'd also strongly recommend creating a comprehensive spreadsheet documenting every source you've checked, the information obtained (or lack thereof), and how each piece of evidence supports your final basis calculation. This becomes your "basis reconstruction methodology" that you can present to your tax preparer or the IRS if questioned. Don't overlook the importance of documenting ANY improvements made over the years, no matter how small. That ceiling fan installed in 1992, the bathroom vanity replaced in 1999, even minor plumbing repairs - they all add to your basis. For items without receipts, use reasonable estimates based on what those improvements would have cost at the time they were made. The $1.35M sale price minus $420K estimated construction cost plus $30K land cost still leaves substantial capital gains, but with proper documentation of all improvements over 35+ years, you could potentially add another $100-200K to the basis. Combined with the capital gains exclusion if they qualify, their tax liability could be much more manageable than they're fearing. Keep meticulous records of your research process - the IRS respects taxpayers who make genuine efforts to comply with the law using reasonable methods when original documentation isn't available.