Home Improvements

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 prices (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.

Below lists some other examples of improvements:

• Additions: Bedroom, Bathroom, Deck, Garage, Porch, Patio
• Lawn & Grounds: Landscaping, Walkway, Fence, Retaining Wall, Sprinkler System, Swimming Pool
• Miscellaneous: Storm Windows, Doors, New Roof, Central Vacuum, Wiring Upgrades, Satellite Dish, Security System
• Heating and Air Condition: Heating system, Central Air Conditioning, Furnace, Duct Work, Central Humidifier, Filtration System
• Plumbing:  Septic System, Water Heater, Soft Water System, Filtration System
• Interior Improvements: Built-in Appliances, Kitchen Modernization, Flooring, Wall-to-Wall Carpeting

Record keeping. 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 suggested by the IRS 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

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