How Home Improvements Can Help Reduce Capital Gains Taxes for Qualified Homes
Smart tax planning can help you save significant money when you’re ready to sell your home, and leveraging home improvements is one strategy. Here’s how it works: If you’ve undergone a home remodel or upgrades, keep those receipts — they could help you reduce capital gains taxes on your home. When you sell your home, the IRS considers the appreciated value or sales price of your home to define a taxable gain.
To determine potential taxable gains, subtract the original value you paid for your home (the “basis”) from the sale price. Keep in mind, after living in a primary residence for two years before selling a home, individuals have up to $250,000 of gains that are tax-free ($500,000 for couples). There are various deductions, exemptions, and home-selling costs you should consider but here’s a simple example:
| Sale Price | (-) Basis | (=) Possible Taxable Gain |
| $2,000,000 | $800,000 | $1,200,000 |
However, if you made any eligible home improvements, you can add their value to your basis to determine an “adjusted basis.” The adjusted basis will be higher, which can help reduce your capital gains and save on taxes. For example:
| Basis | (+) Home Improvements | (=) Adjusted Basis |
| $800,000 | $500,000 | $1,300,000 |
| Sale Price | (-) Adjusted Basis | (=) Possible Taxable Gain |
| $2,000,000 | $1,300,000 | $700,000 |
Which home improvements should you consider? While this list is not exhaustive, here are typical improvements you should track to help reduce your capital gains:
- Exterior Improvements: Landscaping, pools, patios, decking, roofing, and siding
- Interior Improvements: Room additions, fireplace additions, kitchen and bathroom remodels, and flooring
- Systems Improvements: Heating and air conditioning systems, water filtration, and septic systems
We want to help you prepare for the costs and opportunities of home improvements and selling your home so you can confidently navigate tax implications. We encourage you to take our one-minute assessment so we can better understand your financial picture and determine how we can best support you. Take the assessment now.
For more information about capital gains when selling your home, visit our blog post, “Refresher on Capital Gains Taxes – Primary Residence Sales,” or contact us to learn more.
Audio Transcript:
Ann Timoney (00:07):
Are you thinking of remodeling your home? Have you ever wondered what home improvement costs should be documented for tax purposes? Why does this matter? Because if you were to sell your home in the future and it’s gone up in value a great deal, you could be facing significant capital gains taxes and good documentation of improvement costs can help you save on those taxes. I’m Ann Timoney with Opes Wealth Management. The original price you pay for your home is what the IRS calls the basis. Certain home improvement costs can be added to the basis for what then is called the adjusted basis. How gain is determined in the future is a function of the sale price minus your adjusted basis or minus your basis, and that determines if you have a taxable gain. In order to save money on capital gains taxes, it’s best to document the following types of improvements and keep your receipts forever. The first set is for exteriors of the home. We’ve got landscaping, pool, patio decking, a new roof, or a new siding, interior room additions, kitchen or bath remodels, new flooring, a new fireplace, and systems — heating, air conditioning, and new water systems like septic water filtration. There are several things that could be added to the basis, and this list I’ve given you is partial. For more information on how capital gains tax works, how gain is calculated, please click the link to an article provided for that.
Written by: Ann Timoney Personal Financial Advisor, CFP®
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