Save Your Home Improvement Receipts — Here's Why

When you make improvements to your home, you can generally add the cost of improvements to your home's basis — and a higher basis can help you avoid or reduce tax on any profit you make when you sell your home.

An example of how it works.

Let's say you purchase a home for $1 million and spend $500,000 on improvements. Your home's adjusted basis would be $1.5 million. Now let's say you sell the home for $1.7 million dollars, resulting in a capital gain of $200,000. Because individuals who meet ownership and use tests can generally exclude up to $250,000 ($500,000 for joint filers) of the gain in this example is taxable. But if you do not keep track of your home improvement expenses and you do not adjust your home's basis, your net gain would be $700,000 and part of it would be taxable.

Improvements that increase basis.

You can generally add to your home's basis the cost of improvements that add to your home's value, prolong its life, or adapt it to new uses. Examples include:

IRS publication 523 provides more information about the improvements of your home's basis.

This article was published in the September/October 2022 issue of Eye on Money. If you would like to be added to our mail list, please email jennifer@dh-cpa.com.