Keep Track of Improvements
People are staying longer in their homes according to the National Association of Realtors and the U.S. Census. Over time, even a modest appreciation could result in a significant gain and homeowners should have a strategy to minimize possible taxes.
Maintenance on a principal residence is not deductible but improvements can add to the basis which can reduce the gain in the sale. Improvements are easily identified if they add to the value of a home, prolong its useful life or adapt it to new uses.
Receipts and other proof, such as pictures, should be kept during ownership and for several years after the sale of the home. They can include the closing statements from the purchase and sale of the home and all receipts for improvements, additions or other items that affect the home’s adjusted basis or cost.
For a principal residence, basis includes the price paid, plus certain acquisition costs and capital improvements made. When the property is sold for more than the basis, there is a gain. Currently, homeowners that meet the requirements can exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly.
A simple strategy is to put documents that affect the basis of the home in one envelope. Any receipt for money spent on the home that isn’t the house payment or utilities, goes into the envelope. Your tax advisor will be able to sort through them to determine the capital improvements.
For more information on determining basis or capital improvements, see IRS publication 523, Selling Your Home.