When you prepare to sell your personal residence -- if you have lived in it for the last two out of five years -- there can be a substantial capital gains exclusion. Tax Reform 2018 retained the home sale tax exclusion of $250,000 for single people and $500,000 for married couples filing jointly. This means you can exclude that amount of profit from your tax liability. This is all well and good, but in some markets like the city of Boulder, where average home prices exceed $1 million, these exclusions have not kept up with the market.
However, capital improvements made to your home could help reduce your taxes. In any market, it is important to keep records of the capital improvements you make to your home. Why? Because any capital improvements you make can be added to the cost basis of your home and thereby reduce the amount of capital gain from the home sale. It is easy for homeowners to forget to take advantage of these adjustments that will keep the gain as low as possible. In most cases, homeowners simply have not kept good records and end up using estimates that could be contested.
The first question is, “What constitutes a capital improvement?” The answer: it is not a repair.
You don’t need to keep the receipt for fixing the leaking faucet. The general test for a capital improvement is as follows:
- Does it substantially add value to the property?
Replacing a broken window does not.
Replacing all of the windows does.
- Does it extend the life of the property?
Replacing a couple of shingles does not.
Replacing the entire roof does.
- Does it change the usage of an area in the home or add square footage?
Converting a bedroom to a home gym by adding an exercise bike doesn’t.
Adding square footage to add a home gym does.
A few examples of capital improvements are:
Air conditioning Kitchen remodel Basement finish
Cabinets Bathroom remodel Landscaping
Security system New flooring Fence
New roof Complete painting Insulation
New windows New furnace Driveway replacement
If there is any doubt as to whether an update is a capital improvement or a repair, be sure to consult your tax advisor. In fact, your tax advisor can help you set up a record keeping system that might include paper or electronic record keeping of all the money you spend on your house.
As a minimum, plan on keeping receipts, credit card and bank statements, and canceled checks -- and maybe even a photographic record of your home improvements. Over time, the dollars spent on improvements really add up. On a year-to-year basis, keeping these records won’t help you with the current year’s tax return unless you are selling, but you will be very glad you have good records when you put your home on the market.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611