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For tax purposes, develop a record of your home improvements..
Home Improvements -- Adding to Your Basis
An important part of the ownership of a home is the preparation for its eventual sale. A good example of this is maintaining records of any capital improvements that you make to the house, since the value of these add to the basis of your house. When your house has sold and all proceeds have been collected, your capital gains will be based on the difference between the sales price (less any selling expenses) minus the adjusted basis. The IRS lists the following as increases to basis:
1) Improvements
2) Additions
3) Special assessments for local improvements, and
4) Amounts you spent after a casualty to restore damaged property.
The IRS defines improvements as those items that "add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements to the basis of your property."
Examples: Putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway are improvements.Additions to Basis
Keep this form with receipts for all improvements done to the home. Examples: additions, new roofs, new windows,etc.
DATE
ITEM DONE
DONE BY
COST
RECEIPT
The chart below lists some other examples of improvements
Additions
Miscellaneous
Plumbing
Bedroom
Storm windows, doors
Septic system
Bathroom
New roof
Water heater
Deck
Central vacuum
Soft water system
Garage
Wiring upgrades
Filtration system
Porch
Satellite dish
Interior Improvements
Patio
Security system
Built-in appliances
Lawn & Grounds
Heating and Air Conditioning
Kitchen modernization
Landscaping
Heating system
Flooring
Walkway
Central air conditioning
Wall-to-wall carpeting
Fence
Furnace
Insulation
Retaining wall
Duct work
Attic
Sprinkler system
Central humidifier
Walls, floor
Swimming pool
Filtration system
Pipes, duct work
Document Source: IRS Publication #523, year 2003. ( http://www.irs.gov/pub/irs-pdf/p523.pdf )
Record keeping. You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if the basis of your old home affects the basis of your new one, such as when you sold your old home before May 7, 1997, and postponed tax on any gain, you should keep those records as long as they are needed for tax purposes.
The records you should keep include:
1) Proof of the home's purchase price and purchase expenses
2) Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis
3) Any Form 2119 that you filed to postpone gain from the sale of a previous home before May 7, 1997
4) Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions
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