Dear John: When we bought our home for cash 14 years ago, I spent another $130,000 on improvements. I paid the contractor by check. Now we plan to put this home on the market.
I now discover that we misplaced or destroyed the canceled checks. I’m going to need to include the cost of this major makeover against my gain. Without canceled checks, how can I prove that the improvement actually took place? F.A.
Dear F.A.: You needed a building permit, didn’t you? And the town in which you live probably increased your taxes based on the additions.
Alan J. Straus, chairman of the New York Society of Certified Public Accountants, says that the IRS will accept other evidence in lieu of canceled checks, items such as contractors’ invoices, building permits and bank statements showing withdrawals with dates that match the invoices.
The government, says Straus, will also accept “testimony and affidavits of knowledgeable individuals” who know about – or worked on – the changes in your house.
See? And you automatically thought the government would be unreasonable.
Dear John: A reader recently asked whether the discharge of debt by a credit card company would have tax implications. You quoted expert Marc Albaum as saying that it did.
I’m wondering if you can avoid those tax consequences if there is a provision stating that such debt settlement is not, in fact, a “forgiveness” of the debt, but rather a settled amount agreed upon as a result of the dispute.
Seemingly, this would make it clear that the amount deducted from the original amount in dispute is not any waived debt, thus it is not a “gain” or “ascension to wealth” under Internal Revenue Code Section 61(a). Wouldn’t such a provision protect the taxpayer from this amount being classified as “taxable income” under the IRC? C.M.
Dear C.M.: Nice try. But Ginger Broderick, a New York CPA, agrees with Albaum. “Any discharge of actual credit card charges is considered taxable income to the individual and reported to him on a 1099-C as cancellation of debt, Broderick says.
Perhaps the charges “in dispute” would be additional late charges, collection or legal fees that the credit card company incurs in the efforts to collect its money, the experts says.
“One needs to review the provisions in the contract that the individual signed with the credit card company. The taxpayer should also consult with an attorney regarding his state laws regarding discharge of debt,” Broderick adds.
Send your questions to Dear John, The N.Y. Post, 1211 Ave. of the Americas, N.Y., N.Y., 10036, or john.crudele@nypost.com.