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Home Improvement Guide 2007
On the money
Whether it's a fresh coat of paint or a total home renovation, sooner or later it comes down to paying for it.
On the money
Home improvements reduce capital gains tax

If you stand to cash in big when you sell your home it's important to remember that every dollar spent on home improvements, remodeling and renovations can mean a dollar off your federal tax bill when that day comes.

That's because money spent on capital improvements is subtracted from your profit -- if and when you sell -- and thereby reduces the amount you may have to pay as long term capital gains tax.

This is how it works: When you sell your home very often you get to experience one of the best things about the way your home has by realizing a tidy profit. That's also one of the worst things.

If you net more than the IRS exclusion amount, you'll have to share some of your sale proceeds with Uncle Sam.

Tax law allows a single homeowner to escape an IRS bill on the first $250,000 in home-sale profit and $500,000 for married couples.  But some owners find that's not generous enough. This is often the case where an owner has lived in the same house for many years. Even in areas where the real estate market has softened somewhat, many sellers are still making a pretty penny on their sales.

Don't worry. You don't have to slash your home's selling price to keep part of the profit out of IRS hands. Some home improvement projects can boost your property's basis, the figure you subtract from your sale price to arrive at your taxable profit. The bigger your basis, the lower your tax bill.

Building on your basis
Basis, the IRS term for your home's value, begins with the amount you paid for your house. It includes settlement and closing costs and any debt. If you inherited the property, your basis is its fair market value on the day the previous owner died.

Home improvements that meet IRS guidelines can increase your home's basis. The tax agency says the property-related project must either materially add to the value of your home, considerably prolong its useful life or adapts it to new uses.

Common improvements that meet IRS specifications include putting a recreation room in your unfinished basement, adding another bathroom or bedroom putting up a fence, putting in new plumbing or wiring, installing a new roof and paving your driveway.

-- Posted: April 4, 2007
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