why keep track of home improvements

Why Keep Track of Home Improvements?

As a homeowner, you will receive a generous exclusion on the gain of your principal residence. Current rules stipulate $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. Many people probably consider the gain or profit to be the difference between the purchase price and the sales price.

Before calculating your gain, the IRS will allow you to lower the sales price by adding in the selling expenses. These include normal expenses like real estate commission title fees, attorney fees, and any other sales-related expenses if they are normal and customary.

Another significant adjustment is any capital improvements you made to your home while you owned the home can be added to the cost basis. Normal maintenance and repairs like fixing leaks, filling holes or cracks, or replacing broken hardware are not considered capital improvements unless they are part of a larger renovation or construction project on the home. To be a capital improvement, the IRS states it must add value to your home, prolong its useful life, or adapt it to new uses.

Improvement Examples that will Increase your Basis

  1. Additions. Bedroom, bathroom, deck, garage, porch, patio.
  2. Lawn & Grounds. Landscaping, driveway, walkway, fence, retaining wall, swimming pool.
  3. Exterior. Storm windows/doors, new roof, new siding, satellite dish.
  4. Insulation. Attic, walls, floors, pipes, and ductwork.
  5. Systems. Heating system, central air conditioning, furnace, ductwork, central humidifier, central vacuum, air/water filtration systems, wiring, security system, lawn sprinkler system.
  6. Plumbing. Septic system, water heater, soft water system, filtration system.
  7. Interior. Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace.

For more information, see IRS Publication 523.

In addition to enhancing your home, capital improvement increases the cost basis of your home, which in turn reduces the size of any taxable profit when it is sold. With an average homeowner staying in their home for 10 to 12 years, the total sum of improvements could be significant.

As an example, let us say a single taxpayer sold their home for $350,000 more than they paid for it.  If their selling expenses were $25,000 and they had made $75,000 of capital improvements during the holding period, the gain would be $250,000 and within the limits, for a single taxpayer to exclude all of it instead of having a $100,000 gain.

For this reason, it is necessary to be able to prove the amount you spend on capital improvements. Set up a routine to keep receipts and canceled checks for all your expenditures on your primary residence. Even if you are not sure what qualifies as an improvement, having a receipt when you sell and consulting a tax professional will help you get a determination.

In addition to receipts and canceled checks, a contemporaneous register listing the date, description, and amount spent will provide accurate information for calculations and serve as evidence should it be needed in the future.

There is more information in my Homeowners Tax Guide that is available for you to download.

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