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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 your house has sold and all proceeds
have been collected, 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:
1) Improvements
2) Additions
3) Special assessments for local improvements, and
4) Amounts you spent after a casualty to restore damaged property.
The IRS defines improvements as those items that
"add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements
to the basis of your property."
Examples: Putting a recreation room in your unfinished basement, adding another bathroom or bedroom,
putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway are improvements.
The chart below lists some other examples
of improvements
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Additions
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Miscellaneous
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Plumbing
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Bedroom
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Storm windows, doors
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Septic system
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Bathroom
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New roof
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Water heater
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Deck
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Central vacuum
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Soft water system
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Garage
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Wiring upgrades
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Filtration system
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Porch
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Satellite dish
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Interior Improvements
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Patio
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Security system
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Built-in appliances
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Lawn & Grounds
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Heating and Air Conditioning
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Kitchen modernization
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Landscaping
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Heating system
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Flooring
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Walkway
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Central air conditioning
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Wall-to-wall carpeting
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Fence
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Furnace
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Insulation
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Retaining wall
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Duct work
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Attic
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Sprinkler system
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Central humidifier
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Walls, floor
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Swimming pool
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Filtration system
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Pipes, duct work
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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
Maintain a record of additions
to your basis here
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