If you’ve owned and used your home as your principal residence for at least two of the previous five years, you can elect to exclude from federal income tax up to $250,000 of home sale profit if you’re a single filer and $500,000 for joint filers. The taxable amount for purposes of the exclusion is the difference between the selling price and your adjusted basis in the home.
It is important to keep a list of your home improvements to determine your basis for tax purposes when selling your home. As a general rule a home improvement that adds to your home’s value or prolongs its useful life can be added to basis. This list includes the following items:
- Finishing a basement or attic
- New plumbing, heating, or A/C
- Adding a fireplace or new room
- Adding a patio, deck or swimming pool
- Installing aluminum or vinyl siding, storm windows or doors
- New landscaping
Note that the cost of repairs does not qualify as improvements – expenses for painting, fixing gutters, plastering walls and replacing broken windows – are NOT added to your basis. However, if you lump in repairs with home improvements, the entire cost may be treated as a general renovation. Schedule repairs when you’re doing improvements to give your basis and extra nudge.
Additionally the following expenses can be added to your basis to potentially reduce your tax gain:
- Attorney’s fees
- Closing costs and settlement fees
- Title search and insurance
- Broker commissions
- Survey and appraisal fees
- Recording fees for deed and mortgage.
Be sure to keep good records.