Homeowners avoid tax on $1 million capital gain

Without records of improvements, IRS audit could bring trouble

DEAR BENNY: Friends of mine recently sold their home they owned for 22 years for $1.5 million; they paid about $500,000. They told me that they did not have to pay any capital gains tax, because their tax advisor claimed that they must have spent at least $1 million on improvements over the 20 years they owned it, although they did not have any records. He told them that it was within IRS guidelines, and their tax return was accepted without any problems. Do you have any knowledge of those IRS guidelines? It is important for me because the existence of such guidelines will determine if I should sell my home or not. --Russ DEAR RUSS: Hopefully, your friend did not get audited by the IRS. Although there may be an IRS ruling, I know of none. A good source of information can be found in IRS Publication 523, entitled "Selling Your Home," which is available from the IRS Web site. Basis is basically what you paid for your house. Adjusted basis adds any improvements t...