| Rev proc 2006-32 didn't give a safe harbor for the cost of improvements, it gave a safe harbor for the decrease in FMV. Big difference.
Anyway I had similar problems with some clients after Rita as far as coming up with the cost of improvements. I had a few audits on the safe harbor losses (all no change) but I asked her how they were handling the issue of cost of improvements with no proof. She said as long as it was REASONABLE they were allowing it. Most of my clients remembered things like "we added on back in the 80's and we paid..." A few of my clients didn't have a clue, not many but a few. For those they did a little researching to see what the price of things were back in the year that it was done, like an addition would be so much per square foot back in whatever year. We did the best we could in other words. We tried our best to be reasonable. There was truely no way to get the records when a person had a house for 30 years and after the hurricane they only had a slab. The auditor seemed fine with that, and there aren't too many auditors in this area (I believe we share the same auditors on this) that were handling the hurricane loss returns. So I would say, find what ever reasonable way you can. If the improvements weren't done too long ago they could contact the company who did the work and see if they have records. Our problem was most of those companies lost records too, so we did the best we could.
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