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Capital Gains Got You Down? Home Repairs Could Come to the Rescue

Capital Gains Got You Down? Home Repairs Could Come to the Rescue

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If you’ve recently sold your house for a hefty profit, a large capital gains bill from the IRS could be looming. Although capital gains can be tricky to calculate in some circumstances, knowing how the repairs you’ve made over the years could help to offset the profit will give you a better idea of your true tax liability before you hand off everything to your qualified tax preparer.

Calculating Capital Gains

When you incur the profit on the sale of your primary residence of at least the last two years, the IRS provides substantial deductions ($250,000 for single tax filers and $500,000 for joint tax filers) that cover the bulk of the capital gain for many taxpayers. To determine whether you have a capital gain or a capital loss on the sale of the property, you simply subtract your tax basis on the property from the sales price.

Your tax basis is the price you originally paid for the home, as well as many of the closing fees found on the settlement statement and any capital improvements you’ve made. For instance, if you sold a home for $500,000 that you purchased for $200,000 and didn’t make improvements to, your capital gain on the property would be $300,000. Assuming single tax filer status, you would subtract the $250,000 deduction from the profit to reach a taxable capital gain of $50,000.

Offsetting Capital Gains

While paying taxes on $50,000 instead of $300,000 can seem like a bargain, you may be able to further lower your tax burden when you take into account the amount of money you’ve spent fixing up your home over the years. In order to add repairs and improvements to your tax basis, you must be able to verify them through receipts, invoices or credit card statements. They must also meet certain qualifications that will make them capital improvements in the eyes of the IRS.

Let’s say that you put in a pool for $60,000 in our above scenario. Instead of a tax basis of $200,000, your basis is now $260,000. Because your capital gain now falls within the allotted $250,000 single filer deduction, you wouldn’t owe capital gains tax on the sale of your home.

Capital Improvements and Repairs

If you have any doubt about whether the repairs and improvements you’ve made over the years count as capital improvements, it’s always best to seek the counsel of a seasoned tax accountant. Generally speaking, a repair or improvement only counts as a capital improvement if it’s meant to last for more than one year. This means that the flowers you have to replant seasonally do not count towards your tax basis, while the retaining wall and other hardscaping projects in your yard would count toward the basis.

When it comes to evaluating whether repairs count, it can help to consider the condition of the property after the repairs. Any repair that returns the property to its previous condition is a just a repair, while repairs that improve the property to “like new” condition are capital improvements and do impact your tax basis. The improvements you use for the tax basis must also still be in place at the time of the sale, so you can’t count the carpets you put in nine years ago if you replaced them with hardwood floors the year prior to selling the property, though you can count the cost of the hardwoods.

In addition, work to the following, or repairs that occurred during the scope of the following projects, could count toward your basis:

  • Additions
  • Electrical System
  • Exterior Work
  • HVAC System
  • Insulation
  • Interior Work
  • Lawn and Grounds
  • Plumbing System.

IRS Publication 523 provides specific examples of capital improvements within each category on the chart on page 12.

It also bears mention that any work done to your home as part of an insurance claim following a fire, flood or natural disaster only counts as a capital improvement when the work goes beyond restoring your home to its pre-disaster condition. Replacing the destroyed carpet wouldn’t count, but upgrading to a higher quality of flooring during repairs could affect your tax basis. When in doubt, be sure to keep all receipts, invoices and insurance damage statements so that you can consult with your tax preparer about how they might impact your basis when you sell your home.

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