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Home Improvements -- Adding to Your Basis
An important part of the ownership of a home is the preparation
for its eventual sale. A good example of this is maintaining records of any capital improvements that you make
to the house, since the value of these add to the basis of your house. When it comes time to sell the home, your
capital gains will be based on the difference between the sales price (less any selling expenses) minus the adjusted
basis. The IRS lists the following as increases to basis:
The chart below lists some other examples of improvements
Paying For Your Improvements. The most popular way of financing home improvements is through a home equity loan or line of credit. Interest rates are generally lower thatn other types of loans, you will usually have more flexibility in repayment terms and interest charges (since they are considered mortgage interest) may be tax deductible.
Recordkeeping. You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if the basis of your old home affects the basis of your new one, such as when you sold your old home before May 7, 1997, and postponed tax on any gain, you should keep those records as long as they are needed for tax purposes.
The records you should keep include:
1) Proof of the home's purchase price and purchase expenses
2) Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis
3) Any Form 2119 that you filed to postpone gain from the sale of a previous home before May 7, 1997
4) Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions
Document Source: IRS Publication #523