Taxes: Keeping Track of Home Improvement Expenses

by Steve CookDecember 8, 2016

How would you like to save thousands of dollars in taxes by spending just a few minutes each year doing a little extra bookkeeping? All you need to do is keep a good record of what you spend on home improvements and you can save a lot on capital gains that you might be required to pay when you sell.
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Capital gain gains are the profits you make from selling an asset like your home. When homeowners sell their primary residence, they can exclude up to $250,000 of their profits from capital gains taxes. For married couples filing jointly, the exclusion is $500,000.

That is much money, but it is not out the question that a family home owned for many years in one of America’s hotter housing markets could appreciate that much or more. The tax hit on capital gains can be substantial when they exceed the exclusion. Thousands of homeowners end up paying more capital gains taxes than they owe.

Many people mistakenly believe that their gain is simply the sales prices minus the original purchase price. However, figuring the real amount on which you should be taxed is not so simple. Your gain is your home’s selling price, minus deductible closing costs, selling costs, and your tax basis in the property. Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments.

Examples of selling costs include real estate broker’s commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees.
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Keeping good records makes all the difference in increasing basis, thus lowering the amount of which you might have to pay taxes. You might even lower it below your exclusion so that you will not owe any capital gains taxes at all.

Deductible closing costs include points or prepaid interest on your mortgage and your share of the prorated property taxes. Examples of selling costs include real estate broker’s commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees. It is a good idea to file these away when the transactions are completed.

Keeping accurate records of improvements is the area where most people fall short. Improvements are different from maintenance costs. Improvements add to the values of the home. These include room additions, finishing basements and converting garages into livable space, updating systems like air conditioning and heating, adding outdoor extras like fences and lighting, and more.

Over the years that you own the home, these annual expenditures add up and can increase your basis by tens of thousands of dollars.


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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

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