When you make a home improvement, such as installing central air conditioning or replacing the roof, you can’t deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.
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Improvements versus repairsThe money you spend on your home breaks down into two categories, tax-wise: the cost of improvements versus the cost of repairs.
Capital improvementsYou add the cost of capital improvements to your tax basis in the house.
Your tax basis is the amount you’ll subtract from the sales price to determine the amount of your profit.A capital improvement is something that adds value to your home, prolongs its life, or adapts it to new uses.There’s no laundry list of what qualifies as a capital improvement, but you can be sure you’ll be able to add the cost of:
An addition to the houseSwimming poolNew roofNew central air-conditioning systemCapital improvements are not restricted to big-ticket items, though. Other qualifying improvements include adding:
An extra water heaterStorm windowsAn intercom systemA home security systemCertain energy-saving home improvements can also yield tax credits at the time you make them.
Home repairsThe cost of repairs, on the other hand, is not added to your basis. Examples of repairs rather than improvements include:
Fixing a gutterPainting a roomReplacing a window paneScroll to Continue
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Tracking is less critical than in pastIn the past, it was critical for homeowners to save receipts for anything that could qualify as an improvement. Every dime added to the basis was a dime less than the IRS could tax when the house was sold. But, now that home-sale profits are tax-free for most owners, there’s no guarantee that carefully tracking your basis will pay off.
Save when you sellUnder current law, if you have owned and lived in the home for at least two of the five years leading up to the sale,
The first $250,000 of profit on the sale of a principal residence is tax-free for single filers.The first $500,000 of profit is tax-free for married couples who file joint returns.Here’s how to determine the size of your profit when you sell:
Calculate the total of everything you paid for the house – the original purchase price, fees, and so on.Add to that the cost of all the improvements you have made over the years to get a grand total, which is known as the “adjusted basis.”Compare the adjusted basis with the sales price you get for the house.If you’ve made a profit, that gain may be taxable (generally, only if the profit is more than $250,000 for an individual or $500,000 for a married couple filing jointly).
Some additional notes on how selling a home may affect your taxes:
Unfortunately, losses on sales of personal residences are not deductible.If you sold a home prior to August 5, 1997, and took advantage of the old rule that let home sellers put off the tax on their profit by “rolling” the profit over into a new home, your adjusted basis is reduced by the amount of any rolled-over profit.You can see it makes sense to keep track of whatever you spend to fix up, expand or repair your house, so you can reduce or avoid taxes when you sell.
Being preparedMake a special folder to save all your receipts and records for any improvements you make to your home.If you’ve lived in your house for many years, and area housing prices have been gradually going up over all those years, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.If you operate a business from your home or rent a portion of your home to someone, you may be able to write off part of your home’s adjusted basis through depreciation.If you do so when you sell the house you can’t exclude the amount of depreciation you took under the $250,000/$500,000 gain exclusion break.Also, the cost of repairs to that portion of your home may be currently deductible.TurboTax will search over 350 deductions to get your maximum refund, guaranteed. If you’re a homeowner, TurboTax Deluxe gives you step-by-step guidance to help turn your biggest investment into your biggest tax break.