Keeping track of improvements you make to your home can really pay off on your tax return when you come to sell your home.
While you may think everything you do to your home is an improvement, the IRS may not agree. Adding a new deck would count as a capital improvement, for example, but repairing your old one wouldn’t.
Tax regulations let you add the cost of capital improvements to the cost basis of your home. And when you come to sell, a higher cost basis lowers the total profit that you have to pay capital gains tax on.
That may or may not be a big deal for you depending on how long you are staying in your home. Provided you live in your home at least two years, you should be exempt from paying taxes on the first $250,000 of profit anyway. And that is just for a single filer. It doubles to $500,000 if you file jointly. Regardless, if you plan to live in your house a long time and make lots of improvements, keeping good records makes a lot of sense.
So what, exactly, is a capital improvement? The IRS takes the view that a capital improvement is something that increases your home’s value, unlike a repairs, which is really just correcting something that needs to be fixed. The IRS also says that capital improvements have to last for more than one year and add actual value to your home.
The improvements must also be evident when you sell. So if you put a new 50-year roof on and then sell two or three years later, that would be a capital improvement. If you waited 30 years to sell then not so much. And repairs, like painting your house or fixing sagging gutters, definitely don’t count. The IRS considers these as necessary maintenance items. Now replacing old single-pane windows with modern dual-pane windows would certainly be a capital improvement, while just fixing damaged windows would not be. Similarly, a major kitchen remodel such as the one pictured above is a capital improvement, while just replacing appliances and painting the cabinets would not be.
As you can imagine, there could be many gray areas here. If in any doubt about any of this, you should definitely talk to your tax advisor before filing a return.