The question sounds like bookkeeping and it is not. On a property held for decades, the single number that decides what you owe is often the one nobody can prove.
A client bought a small commercial building in 1994. Over thirty years he put on a roof, replaced the HVAC twice, repaved the lot, and renovated two suites. He remembers all of it. He has paperwork for almost none of it.
What basis is made of
Adjusted basis is a running total: what you paid, plus the closing costs that were capitalized, plus capital improvements along the way, minus depreciation taken.
Here is what the missing paperwork actually costs:
| With records | Without | |
|---|---|---|
| Purchase price, 1994 | $380,000 | $380,000 |
| Documented capital improvements | $240,000 | $0 |
| Depreciation taken | $310,000 | $310,000 |
| Adjusted basis | $310,000 | $70,000 |
Same building, same history, $240,000 of difference in basis. On a sale that is roughly $57,000 of additional federal tax at 20% plus the net investment income tax, before any state.
In an exchange the money does not disappear, it follows you. Basis carries forward into the replacement property, as we described in depreciation after an exchange, so an understated basis understates your depreciation on the next property too, for as long as you own it.
The rule people get backwards
Depreciation reduces basis whether or not you claimed it.
The standard is allowed or allowable. An owner who never took depreciation, or whose accountant missed years of it, does not get to keep the higher basis as compensation. Basis is reduced as though the deductions had been taken.
That cuts one way only, and it is worth knowing because owners sometimes believe not claiming depreciation preserves their position. It does the opposite: they lost the deduction and the basis. Where depreciation was genuinely missed, there are procedures for correcting it, and that is a conversation for your CPA rather than something to leave alone.
Where the evidence actually lives
Records are rarely as gone as people assume. In rough order of usefulness:
- Your own depreciation schedules. The single best source. Every year's return carries the asset detail forward, so a return from any year tells you what was capitalized and when. Prior accountants often hold files longer than clients expect.
- The county recorder and assessor. Purchase price, recorded deeds, and often permit history that evidences major work.
- Permit records. A re-roof or a tenant improvement usually required a permit, which dates and describes the work even when the invoice is gone.
- Old insurance records. Coverage increases after a major improvement, and schedules sometimes describe it.
- The title company from the original purchase. Settlement statements turn up more often than you would think.
- Contractors and suppliers. Larger firms keep job records for a long time.
What will not work is a reasonable estimate written down confidently. Substantiation matters, and an unsupported number is a position you may have to defend years later.
The practical instruction
If you are planning a sale or an exchange in the next few years, start the basis work now rather than in escrow. It takes weeks, it depends on third parties, and it competes with the 45-day window if you leave it.
And if you intend to hold for another decade, the cheapest hour you will ever spend is building the file while the evidence still exists. Your CPA determines what is capitalizable and what your adjusted basis actually is; the job here is giving them something to work from.
Common questions about basis records
What goes into adjusted basis?
The purchase price, capitalized closing costs, and capital improvements, reduced by depreciation taken. Repairs are generally expensed rather than added.
Does it matter if I never claimed depreciation?
Yes, and not in your favor. Basis is reduced by depreciation allowed or allowable, so missing the deduction does not preserve basis. Ask your CPA about correcting it.
Where do I find records for work done decades ago?
Start with your own depreciation schedules and prior returns, then county recorder and permit records, old insurance schedules, the original title company, and the contractors themselves.
Can I just estimate the improvements?
An unsupported estimate is a position you may have to defend. Documented evidence is what protects the number.
Why does this matter in an exchange if nothing is taxed now?
Basis carries forward into the replacement property, so an understated basis follows you and reduces depreciation on the next property as well.
Disclosure: Numerical example is for illustration purposes only; individual circumstances will vary.