The home sale exclusion can be a major help to property owners when it comes time to file. The exclusion grants a shelter from taxes on money gained from the sale of a home: up to $250,000 for single filers and $500,000 for joint filers. While the costs of making improvements to your home may not be eligible for tax deductions, increasing the overall value of your home (the basis) can provide you with the opportunity for tax savings if and when you decide to sell.
The key is in keeping conscientious records of all money you spend to improve your home, including both current and past projects. A sold property is eligible for the home sale exclusion if it has served as your primary residence for at least two of the five years prior to its sale. By making improvements that increase the basis, you’re giving yourself a little more room to shelter the gain you made on the sale. For example, if you add $50,000 of value to your home before selling it, you now have the opportunity to sell the property for up to $550,000 more than its original value while sheltering the entirety of that gain from taxes. Without documentation of those improvements, a $550,000 gain from the sale would leave you with $50,000 upon which you can be taxed.
In 2014, these taxes have actually seen an increase, and there has also been added a Medicare surtax on investment income. It’s always to your benefit to increase the value of your home even if you’re not planning to sell soon, but this strategy will help in the long run when you do make that decision.