Tom Ashworth

Keeping records help save taxes

Tax PlanningA prudent homeowner always prepares for the eventual sale of his home and taxes are a big part of that.  Keeping records of any capital improvement to your home is a good example of such prudence.

During sale of your house your capital gains will depend on the difference between the sale price (after deducting all sale expenditures) and the adjusted basis. According to the IRS these constitute as increase to basis:

  1. Any home improvements.
  2. Additions to the house.
  3. Money spent to recover the property damage after a casualty.
  4. Special assessments for local improvements.

Improvements are defined by the IRS as those items which “add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements to the basis of your property.”

Illustration: Setting up a recreation room, adding a bedroom or bathroom, setting up a fence, new wiring or plumbing, new roof, paving the driveway are some of the examples of what the IRS considers improvements.

There is a difference in how the expenditure on your house is treated for tax purposes. For example, repairs to home for maintenance are not tax deductible. However, if the house is on rent then such repairs are considered as operating expense and are tax deductible.

Capital improvement to your home will increase the basis and therefore affect the gain which may save you money on taxes when you sell the house.

Home improvements that have a useful life of more than 1 year can be considered as an increase to basis. Other increase to basis may include local improvements like sidewalks and expenditure to restore property damage after a casualty that was not covered by the insurance.

Improvements add to the value of the home, prolong the useful life of the home or provide new uses to it. It is therefore different from repairs.

Keep records of all the improvements to prove your home’s adjusted basis. Normally, you should have records for three years from the date of filing return for the tax year when you sold your house.

If the basis of your old house has a bearing on the basis of the new one then you should keep those records for tax purposes.

If you are interested in Real Estate in the Texas Hill Country, please feel free to contact Tom Ashworth (Smart Path Realtor) at (208)830-7992

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