Skip to main content

Why Keep Track of Home Improvements



Homeowners receive a generous exclusion on the gain of their principal residence up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly.  Most people probably consider the gain or profit in a home to be the difference between the purchase price and the sales price.

IRS allows a taxpayer to lower the sales price by the selling expenses before calculating gain.  Normal expenses like real estate commission, title policy, attorney fees, and other sales expenses may be included if they are normal and customary.

Another significant adjustment is that capital improvements made during the holding period can be added to the cost basis.  Normal maintenance like repairs are not considered improvements.  IRS says that if the expenditure materially adds value (features) to the property, or appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use, it can be considered a capital improvement.

Examples could include replacing a heating or air conditioning system, storm windows, new permanent landscaping like trees or shrubs or completing an unfinished basement.  They don't necessarily have to be high-ticket items but can include things like adding dead bolts, ceiling fans, video doorbell and other items.  For more information, see IRS Publication 523.

The total amount of the money that is spent on capital improvements increase the cost basis of the home which in turn will reduce the amount of gain when sold.  With the average person staying in a home for 10 ... 12 years, the total improvements could be significant.

As an example, let's 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.

It is necessary to be able to prove the amount spent and for that reason, a routine should be established to keep the receipts and cancelled checks for all expenditures on their principal residence.  Even if the owner is not sure whether they qualify as an improvement, by having the receipt available at the time of sale, a tax professional can help a homeowner with the determination.

In addition to receipts and cancelled 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 the Homeowners Tax Guide that is available for download.

Comments

Popular posts from this blog

Paying Points to Lower the Rate

Two commonly known ways to lower your mortgage payments are to make a larger down payment especially if it eliminates private mortgage insurance and improve your credit score before applying for a mortgage. Another way to lower your payment would be to buy down the interest rate for the life of the mortgage with discount points.   A discount point is one percent of the mortgage borrowed.   Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate. A permanent buy down on a fixed-rate mortgage is available to borrowers who are willing to pay discount points at the time of closing. Let's look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point.   The principal and interest payment on the 4% loan would be $1,503.86 compared to $1,458.81 on the 3.75% loan.   The $45.04 savings is available because the buyer is willing to pay $3,150 in points.   By dividi

Will Soft Inquiries Hurt Your Credit Score?

Soft inquiries, sometimes known as a soft credit check or a soft credit pull, do not impact your credit scores because they are not attached to a specific application for credit.   They can occur when a credit card issuer or mortgage lender checks a person's credit for preapproval purposes. Examples of soft inquiries are when you check your own credit or one of your current creditors checks your credit.   If you are concerned about the negative impact on your score, specify to the lender that you want a "soft pull" to see if you qualify for preapproval. Soft inquiries may appear on your credit report but should not adversely affect your credit score. Consumers are entitled to one free copy from each major credit bureau, Experian, Equifax and TransUnion, once every twelve months available at AnnualCreditReport.com .   Hard inquiries occur when a borrower makes a new application for credit.   These will impact your credit score and will remain on your credit report

Why a Home Should Be Your First Investment

Real estate has been described as the basis of all wealth.   Without considering income or investment property, buying a home to live in is an incredibly powerful way to build wealth or financial net worth. A home is an asset measured by the size of the equity.   Equity is simply the difference between the value of the home and the amount owed.   There are two powerful dynamics at work to increase the equity which include appreciation and amortization. Appreciation occurs when the fair market of the home increases.   The shortage of available inventory coupled with high demand has contributed to an 18% increase in value in the past year on average for homeowners in the U.S. Most mortgage loans are amortized with monthly payments that include the interest that is owed for the previous month and an increasing amount that is paid toward the principal loan amount so that if all the payments are made, the loan would be repaid by the end of the term. A 30-year mortgage at 3.5% intere