"People tend to lose their receipts.
They need to keep all their receipts and invoices, throw
them into a file," says Jeffrey J. Spengler, a
principal at the CPA firm of McCrory & McDowell
LLC, in Pittsburgh.
But don't go overboard. Homeowners often
erroneously include home improvements for which they
"We had a pretty wicked ice storm
here a few years ago, and it seemed like everyone in
my neighborhood had their roof replaced," Spengler
says. "Since it was storm-related and paid for
by insurance, this doesn't add to the value of your
And don't discount something just because
it doesn't fall neatly into the home-improvement category.
It still might be useful in offsetting possible capital
gains. If you spruce up your house with a new paint
job to make it more attractive to buyers, that counts
as a selling expense, Spengler says. Selling expenses
lower the amount you realize on the sale of the home,
which in turn lowers the profit you make.
Home basis in black,
white and gray
Remember, too, that home improvement versus repair is
a gray, rather than black-and-white, tax issue. It makes
good sense to run any construction projects by your
tax adviser, accountant or real estate agent for guidance
on whether the project will pass the IRS test for increasing
And if the project doesn't pass?
"When an audit question comes up
with the IRS about a home improvement, I'll have the
auditor contact the president of the local board of
Realtors here," says J. Michael Roberts, owner
of Creative Tax Solutions, an accounting firm in Laguna
Hills, Calif., and chairman of the California Association
of Realtors' Real Estate Finance Committee.
Local real estate agents can advise the IRS on what
they believe are legitimate home improvements that add
value. Indeed, Roberts points out that such definitions
can vary by region and neighborhood. For example, in
most cases, a stove replacement might be considered
simple maintenance. But if you live in a posh neighborhood
and you replace a four-burner no-name electric stove
with a six-burner upscale Viking, along with adding
other pricey built-in appliances, then you've transformed
your kitchen into a gourmet eatery worthy of Emeril
and, thus, boosted the basis of your home.
"It's really funny how in one area
something that might be considered an enhancement might
be standard in a different area," Roberts says.
Figuring your home-sale
gain or loss
To determine whether you made a profit and might owe
taxes on your home's sale, start with the selling price.
This is the total amount received for your home, including
money, all notes, mortgages or other debts assumed by
the buyer as part of the sale.
Next, subtract any selling expenses, including
advertising, painting or other upkeep performed to improve
the appearance and marketability of the property. This
will give you the amount realized.
Now subtract your adjusted basis from
the amount realized. The result is your gain or loss.
You'll come out tax-free if your gain
is $250,000 or less and you're a single seller; twice
that amount if you and your spouse sell the house. You
also must have lived in the home for two of the last
five years that you owned it.
There is an exception for military
personnel to the time-of-residence requirement.
Members of the armed forces can suspend the five-year
ownership-and-use test period for the time during which
the member, or his or her spouse, served qualified official
If your gain is more than the limit, it
could be time to start digging through your records
to find documentation that could help you increase your
And if you sold at a loss, sorry. There
is no tax break for these unlucky sellers.
Jenny C. McCune
is a contributing editor based in Montana.
editorial assistant Leslie Hunt contributed to this
Posted: April 12, 2006