Saving Receipts to Document Increases in Your Home’s Cost Basis
As you work through your home improvement projects, are you saving all of your receipts and invoices? If your not, you should be. Many of the things that you purchase can be added to the cost basis of your home.
What is cost basis and why is it important?
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt, obligations, other property, or services. The cost also includes the following items (from IRS Publication 551):
- Sales tax
- Capitalized legal and accounting fees
- Advertising costs
- Certain closing costs
- Title search fees
- Recording fees
- Title insurance
The basis can also be increased by capital improvements to your home. There is a distinction between improvements and maintenance. Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. On the other hand, repairs that maintain your home in good condition
Examples of capital improvements (from IRS Publication 523):
- Additions: sunroom, deck or patio, bedroom or bathroom, etc.
- Lawn and Grounds: landscaping, driveway, walkway, fence, retaining wall, sprinkler system, swimming pool
- Heating & Air Conditioning
- Plumbing
- Insulation
- Interior Improvements: built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting
- Miscellaneous: storm windows or doors, new roof, central vacuum, wiring upgrades, satellite dish, home security system
Examples of repairs and maintenance:
- Repainting your house inside or outside
- Fixing your gutters or floors
- Repairing leaks or plastering
- Replacing broken window panes
Recommendations
Obviously, you will want to maintain receipts for all capital improvements. However, I recommend that you also keep receipts for any of the other work that you do. IRS Pub 523 indicates that repainting does not increase the cost basis. However, what if you paint faux finishes? One couls argue that that increases the value of the home. How about window dressings that convey with the sale of the house? I believe that add value too. There is certainly some grey area here. Additionally, the tax code changes frequently. Something that does not increase the basis this year may be considered a capital improvement several years from now.
Jon
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