The IRS allows couples to avoid up to $500,000 of gain on the sale of a house, and singles $250,000 of gain, if you have lived in your home for at least two of the preceeding five years. Even if you feel you will never make that much on the sale of your home, there are many reasons to keep up with the basis in your home.
If you use any part of your home for business or rental, that percentage is subject to capital gains tax when it is sold. You may decide to convert your home to a rental when you move if you have an adjusted basis figure that would allow you a larger depreciation deduction. You could also find yourself moving within the two-year period and would not meet the exceptions to defer gain. Of course, you may have the perfect property to be bought out for an office building or subdivision, or simply be in an area that booms. I am sure that many people in California during the land boom did not think they would ever make “that much money” on their home.
What Receipts Should You Keep?
Your adjusted basis is your cost of purchasing the house including all those ridiculous non-interest costs on your closing statement plus all improvements. Most people assume that “improvements” are rooms or decks added to the house or finishing the basement. But any “improvement” that is not a “repair” increases your basis in the property. Improvements include adding screen doors, fences, garage-door openers, built-in shelving, security systems, etc.
A repair or a like-kind replacement is not an improvement. If the ceiling fan dies and you replace it with a similar fixture, this is a repair. However, if you add a ceiling fan to a room, it is an improvement. If you replace your central air conditioning system with an upgrade as far as efficiency, size, etc., some portion of that upgraded system can be added to your basis.
Receipts for new trees and shrubs are often ignored. While you cannot include the cost of your annual pansies, impatiens or tomatoes, any improvement to the landscape in the form of trees, perennials, and the cost of having this type of landscaping completed is an improvement to your property.
I am sure that most of you are more organized than I am. I have always kept a drawer for house receipts. It also includes all those warranty slips for the ceiling fans and the owner’s manuals for installed appliances. The drawer is full of EXPO Design Center, Home Depot and nursery receipts. In the past when I have sold houses, I went through the drawer and added all the receipts and put them in an envelope to include with that year’s tax information. I then have all the booklets for the next homeowner. I will admit, now that I have been in my current home for more than 15 years, I have almost filled a second drawer.
If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or [email protected].