Home improvements and your taxes

Improvements versus repairs

Capital improvements

• Your tax basis is the amount you'll subtract from the sales price to determine the amount of your profit.
• A capital improvement is something that adds value to your home, prolongs its life or adapts it to new uses.

• an addition to the house,
• a swimming pool,
• a new roof, or
• a new central air-conditioning system.

• An extra water heater
• Storm windows
• An intercom system
• A home security system

Home repairs

• Fixing a gutter
• Painting a room
• Replacing a window pane

Tracking less critical than in past

Save when you sell

• The first $250,000 of profit on the sale of a principal residence is tax-free for single filers.
• The first $500,000 of profit is tax-free for married couples who file joint returns.

• Calculate the total of everything you paid for the house - the original purchase price, fees and so on.
• Add to that the cost of all the improvements you have made over the years to get a grand total, which is known as the "adjusted basis."
• Compare the adjusted basis with the sales price you get for the house.

• Unfortunately, losses on sales of personal residences are not deductible.
• If you sold a home prior to August 5, 1997 and took advantage of the old rule that let home seller put off the tax on their profit by "rolling" the profit over into a new home, your adjusted basis is reduced by the amount of any rolled-over profit.

Being prepared

• Make a special folder to save all your receipts and records for any improvements you make to your home.
• If you've lived in your house for many years, and area housing prices have been gradually going up over all those years, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.
• If you operate a business from your home or rent a portion of your home to someone, you may be able to write off part of your home’s adjusted basis through depreciation.
  • If you do so, when you sell the house you can’t exclude the amount of depreciation you took under the $250,000/$500,000 gain exclusion break.
  • Also, the cost of repairs to that portion of your home may be currently deductible.

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