improvements reduce capital gains tax
"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."
though the cause is something that was a problem, a repair," notes Burkarth,
"you still did the improvement."
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
Begin with your sales price and subtract all notes,
mortgages or other debts assumed by the buyer as part of the sale.
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.
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.
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.
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,"
"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.
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.
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
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.