Capital Gains: Keep Documents to Calculate Cost

Anchor the cost in the purchase documents

The gain calculation starts years before the sale, in the purchase documents. First there is the deed or contract that sets the purchase price, then the costs added to it: transfer duties, notary, inspection and brokerage depending on the type of asset. These acquisition costs, often several thousand dollars, reduce the taxable gain dollar for dollar, provided you can prove them. Keep the transaction's invoices with the deed, in the asset's permanent file. Build the habit at purchase: open a folder on signing day and put in everything the acquisition cost. This is the first layer of the adjusted cost. Nobody contests it when it is documented, and nobody can rebuild it when it is not. File these documents on purchase day.

Distinguish improvement from maintenance

The second layer of cost, additions, follows a strict tax distinction. A durable improvement, which raises the value or extends the life of the asset, adds to the cost. Maintenance, which preserves the condition of the asset, does not. The extension, the new roof, the redone drain and the replaced windows count. Paint and routine repairs do not. There are grey areas, such as a renovation that both repairs and improves. These are settled under the rules and documented accordingly. The absolute condition is still proof. An improvement without an invoice is worth nothing for tax purposes, and tens of thousands of dollars of work paid in cash with no trace is the costliest mistake in real estate. The one discipline to keep: photograph the invoice the same day and file it in the asset's folder.

Document the dates, currencies and disposition

The other elements of the calculation need their own documentation. For dates, note each purchase and each addition at its date. This timeline serves the applicable rules and assets held for a long time. For currencies, in the case of foreign assets, convert each amount at the rate of its own date: the purchase at the purchase rate, the sale at the sale rate. The exchange difference is part of the gain or loss. Finally there is disposition: the brokerage commission, the legal fees of the sale and the direct costs of the transaction are subtracted from the proceeds. This is the last layer of the calculation. Keep the statements that hold this proof well beyond the sale, since tax review periods extend far past the year of the transaction.

Calculate the gain on the complete cost only

Calculate the gain last, once all the layers are assembled: the net proceeds of disposition, minus the complete adjusted cost, which includes the purchase price, acquisition costs and proven improvements. A quick calculation, sale price minus purchase price, overstates the gain and the tax, sometimes by a lot. A building improved over fifteen years can carry tens of thousands of dollars of additions. Ideally you assemble these pieces as you go, with one file per asset updated with every invoice. The sale calculation then becomes a simple addition rather than a dig through old papers. If you neglected an asset, rebuilding the records after the fact is worth the effort. Emails, bank statements and renovation permits help recover the proof, and every documented slice reduces the final tax, at the inclusion rate in force. Keep every invoice.

Checklist

• ✓Keep the purchase deed and its acquisition costs
• ✓Photograph every improvement invoice the same day
• ✓Distinguish maintenance from durable improvement
• ✓Log the additions to cost continuously
• ✓Document dates and currencies for foreign assets
• ✓Add the disposition expenses at the sale
• ✓Calculate the gain on the full adjusted cost
• ✓Keep the statements beyond the sale
• ✓Open the next asset's file at purchase