Published December 16, 2011
Dear Tax Talk,
I sold my home of 30 years for a gain of about $450,000. I'm single, so I know I can exclude up to $250,000 in capital gain from the sale. In the 30 years, I put on three roofs, remodeled the kitchen and baths twice and resurfaced the pool twice. When figuring my cost basis, what do I count as improvements -- the first, the last or all of the repeated improvements?
When you sell your home, you have to figure its basis to determine how much to pay in capital gains taxes. Generally, the adjusted basis of a home you purchase is its cost, including any debt incurred. Your basis is also increased for improvements. An expenditure is an improvement if it adds to the value of your home, prolongs its useful life or adapts it to new uses. You add the cost of additions and other improvements to the basis of your property.
Repairs maintain your home and keep it in good condition, but they do not add to its value or prolong its life. You do not add their cost to the basis of your property. Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.
Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Generally, fixtures that you add to the home and later replace would fall into this category as contrasted with structural improvements. Only the last kitchen remodel and bathroom cabinets, appliances, carpeting and items of a similar kind would be included in your adjusted basis. In my opinion, your adjusted basis would include all repeated structural improvements such as the roof replacement and pool resurfacing. These improvements provide continuing value by preserving the structure for future improvements.
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