A lot more is riding on your home improvements
than just making your house nicer to live in or getting
a better price when you sell. Remodeling your kitchen,
adding a bathroom or even planting some shrubs can reduce
your possible capital gains taxes.
True, the tax code is generous in excluding
from taxes a big chunk of home-sale profit. A single
seller can walk away with up to $250,000 tax-free when
he sells his primary residence; a married couple won't
be taxed on $500,000.
But if you net more than that, you are
in for a nasty capital gains shock. And it's not just
the superrich who are caught in this capital gains trap.
People who have owned their homes for a long time may
see substantial appreciation on the property. In some
hot real estate regions, especially large cities and
their suburbs, home prices have skyrocketed in only
months, not years.
Robert Demmett, partner with the CPA firm
of Eisner & Lubin LLP in New York City, has personally
witnessed this phenomenon: "A client who lived
in the Hamptons for 25 years and who sold his home made
a gigantic amount of money."
No one wants to drop their home's selling
price just to lessen taxes, but there are ways to work
around the potential problem. The easiest method is
to boost your home's value, or as it's known in tax
talk, its basis. When you sell, you subtract your home's
adjusted basis from its sale price to come up with your
profit. If it exceeds the tax-exclusion amount, get
ready to write a check to the U.S. Treasury.
Building on your basis
Uncle Sam defines basis as the amount you paid for your
house. It includes settlement and closing costs and
any debt. If you inherited your home, your basis is
the fair market value on the day the prior owner died.
You can increase your home's basis by
spending money on improvements. Just make sure the upgrades
specs. A tax-acceptable improvement must add value
to your home, "considerably" prolong your
home's useful life or adapt your house to new uses.
Examples include installing new plumbing or wiring,
adding a bathroom, or paving the driveway.
"The overriding factor is doing something
that improves or enhances the value of your home,"
says Jamshed B. Gandi, partner with the San Francisco
CPA firm of Bertorelli, Gandi, Won & Behti. "If
the items are purely for maintenance, to maintain the
home, they are not included."
Simple common sense generally will help
you determine what will add to your property's basis.
The addition of a bathroom or an in-ground swimming
pool, for example, adds to basis. Installing fancy wallpaper
in the master bedroom does not. Fixing leaky faucets
and replacing broken fixtures won't help, either --
they'll count only as repairs, which do not add value
to or extend the life of your home.
The IRS provides a helpful chart on Page
8 of its Publication
523, Selling Your Home. The list of tax-acceptable
- Additions such as a bedroom, bathroom,
deck, garage, porch or patio.
- Heating and air conditioning (for
example, putting in new systems).
- Plumbing (for example, installing
a new soft-water system).
- Interior improvements, such as built-in
appliances and wall-to-wall carpeting.
- Insulation additions to the attic,
walls, floors, pipes or ductwork.
The IRS even includes such miscellaneous
items as a central vacuum, wiring upgrades or a satellite
dish. So enjoy your Direct TV's 700 channels now and
when you sell.
Another common and often-overlooked improvement,
according to Demmett, is landscaping.
Paving your driveway, erecting a fence or even putting
in a retaining wall can add value to your home, boost
its basis and reduce your capital gain when selling.
Also, don't forget those myriad costs
associated with your house purchase. Land-survey costs,
attorney fees and your broker's commission all add to
the value or basis of your home, says Demmett.
Experts agree that the biggest mistake that homeowners
make is not documenting home improvements. Even if you
have no plans to sell, hold onto every Home Depot and
Posted: April 12, 2006