Which Improvements Can Be Added To Your Home's Cost Basis?
Some of the money you spend on your home can be added to its "cost basis," your legally recognized investment in the home. That cost basis becomes important when you go to sell your home because the difference between the sales price and your "adjusted cost basis" is the amount of profit (capital gain) the government may be able to tax you on.
By tracking all the money you invest in your home, you reduce your capital-gains tax liability at sale time. Aside from the price you paid for the home and some other acquisition costs (again, cost basis), tax law allows you to add the costs of improving your home as adjustments--within limits. So, what can you count?
If the home improvement is a major replacement, addition or alteration, it probably is an adjustment to the cost basis. If it's a maintenance or repair expense, it usually isn't. The IRS offers some further guidance.
Improvements are expenditures that add life to your home, increase its value or adapt it to a new use. For example, the addition of a bedroom or storm windows would be improvements. So would upgrading the kitchen or replacing an old heating system with a new high-efficiency unit. (Only the extra expense for upgrading, instead of replacing with similar quality, may be added to the adjusted cost basis.) Want to turn your garage into a family room? It's an improvement because it adapts the area to a new use.
You may not, however, count improvements for which you have already collected residential energy credits or, in case of casualty, for which you have received insurance payment. Any civic improvements, such as a new sidewalk or street, can be added to the home's cost basis, unless you have already been paid for an easement or right of way.
Repair And Maintenance
Repair or maintenance work does not affect the cost basis, even though it adds to the aesthetic value of a home. For example, you cannot count costs for:
- patching damaged walls
- repairing broken windows
- cleaning carpeting
- fixing a leaking faucet
- replacing a non-functioning doorbell
- maintaining lawn and trees
Repairs and maintenance when they are part of an extensive remodeling or renovation are considered to be capital improvements--and can be added to the cost basis.
Fix-up expenses to make a home more saleable--if accomplished within 90 days before the sales contract is signed and paid for within 30 days after closing--will become selling expenses that also increase the cost basis.
Consult your professional tax advisor for further details.