Home improvements aren't only about enhancing aesthetics or comfort—they're strategic investments that can boost the value of your home significantly. But did you know that tracking your home improvement costs can also potentially save you money during tax time?
The Importance of Tracking Your Home Improvement Costs
Tracking your home improvement costs has the potential to result in significant tax savings when you sell your home. When you make material improvements to your home, these costs can be added to the original purchase price of your home, also known as the 'cost basis'.
Reducing Potential Capital Gains Tax: The IRS defines the taxable profit from a home sale as the selling price minus the adjusted cost basis (adjusted cost basis = purchase price + improvement costs). By increasing your cost basis through improvements, your taxable profit when you sell decreases, potentially saving you in capital gains tax.
What Qualifies as a Home Improvement?
The IRS is specific about what can be added to your cost basis. It must be a substantial improvement that increases the home's value, prolongs its useful life, or adapts it to new uses.
Home improvement examples that may qualify:
- Adding a new room or a garage
- Upgrading the kitchen or bathrooms
- Installing a new roof or an HVAC system
- Landscaping your property, including installing a new fence or walkway
- Replacing old windows with energy-efficient ones
On the other hand, costs for repairs or maintenance cannot be added to your cost basis.
Non-qualifying examples:
- Painting a room
- Fixing a leaky faucet
- Replacing a broken window
- Patching a hole in the wall
Tips for Tracking Home Improvement Costs
- Maintain Detailed Records: Start a dedicated file for home improvement receipts, contracts, and documents. This should include the costs of materials, labor, and any professional services. This is important in the event you are audited by the IRS and they request the substantiation of your home improvement expenses.
- Document the Changes: It's always good to have a visual record of the changes. Take pictures of your home before and after the improvements.
- Itemize Your Expenses: Use a spreadsheet to organize the costs associated with each project. This should include the date, work description, and cost, along with a running total.
- Store Records Safely: Keep these records in a secure place. If they are physical, make digital copies as well to protect against loss or damage.
- Consult a Tax Professional: If you're uncertain about what qualifies as an improvement or how to track it, seek advice from a tax professional. They can provide guidance tailored to your specific situation.
By tracking your home improvement costs and understanding how they adjust your home's cost basis, you can potentially save a significant amount on taxes when you sell your home. Always consult with a tax professional to ensure you're accurately accounting for these improvements.