Pay less in taxes when you sell your house
Most people know when they sell their primary residence they have the ability to take a home sale exclusion, $250,000 for an individual, and $500,000 for a married couple, assuming specific criteria have been met.
This home sale exclusion reduces the amount of capital gains tax owed by reducing the number of capital gains, calculated as the sale price of the home minus the cost basis. What you might not realize is that some home improvements may add to the cost basis of your home, thus further reducing the amount of capital gains tax that you might pay.
The IRS defines capital improvements as expenses that would add to the value of your home, prolong its useful life or adapt it to new uses.IRS publication 523has more information on the improvements that will add to your cost basis.
Some of the more obvious improvements that can increase the basis of your home is a kitchen remodel or bathroom addition. But there are other items that may not be as obvious such as landscaping the lawn and grounds, adding in a central air conditioning system or lawn sprinkler system, insulating your walls, and installing wall-to-wall carpeting. It’s important to note that basic maintenance and repairs are typically not tax-deductible and will not be added to your cost basis.
Furthermore, the improvement must still be there when you eventually sell the house. For example, you may have installed wall-to-wall carpeting which would increase cost basis, however, if it was removed later before the sale, that otherwise, valid improvement would no longer count.
Also, if any of these improvements had an energy credit or subsidy, you cannot include those credits or subsidies within your cost basis.
It is important whenever you do home improvements to understand if your project is something that can be tax-deductible later on and if so, keep the records of how much it costs. In rare cases, the IRS might ask for this documentation as part of an audit, but these detailed accounts of improvements will benefit you when you eventually sell your primary residence.