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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
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"The measuring rod is the extent of the repair," says Stein. "If the leak had affected the wood only under the refrigerator and you were able to replace only those pieces that had been water damaged, that would be a repair. But since you replaced the entire flooring, that's a capital improvement."

”Even though the cause is something that was a problem, a repair," notes Burkarth, "you still did the improvement."

Doing the math
The price you get when you sell your home is important, but that's not the number upon which possible taxes are based. It's just the starting point.

Begin with your sales price and subtract all notes, mortgages or other debts assumed by the buyer as part of the sale.

Then subtract all selling expenses. These are such things as advertising, real estate broker's commission, painting or other maintenance done to improve the appearance and marketability of the property. This is your amount realized.

Finally, subtract your adjusted basis, including all those capital improvement to the property over the years, from the amount realized. This gives you your gain or loss.

If you're a single home seller and your gain is s $250,000 or less, you owe no taxes. That exclusion amount is double for married homeowners who file a joint return. Also remember that to take this exclusion, you must have lived in the home for two of the last five years that you owned it.

Documenting the work
Any time you do make a major improvement to your home, be sure to file away all the associated paperwork. You'll need it when you do sell and have to figure your home's adjusted basis and how much profit you recognize on the sale.

"It could be years between the times you make those expenditures and when you need those records, that they become important," says Stein.

"Most homeowners keep their settlement sheet, so they have fairly decent records on their homes' original cost. But many do not keep records of these kind of major improvements," says Stein.

You don't have to submit any of the documentation when you sell, even if you do owe some taxes on the gain. But if you ever face an audit that questions whether you should have paid tax on your property's proceeds, the information can help you prove your case. The tax examiner will want to know when the improvements were made, how much they cost and exactly what they were for.

If you already have a home file in your residential recordkeeping system, simply add a "capital improvements" folder to it. If you don't have such records, start keeping them now and try to locate as much information as possible on prior improvements.

It may take a long time to recognize the value of a capital improvement, but such projects will eventually help you lower any capital gains on your home. And the best thing is that in the years before you sell, you're able to enjoy your basis-enhancing home improvements.

-- Posted: April 4, 2007
 
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