Should you buy an existing house, build a new one, or remodel your current home? Will modifications increase the value of your current house? To decide the path of buying, building or remodeling, the following offers initial information on what constitutes capital improvements for a tax advantage. Why is it important to keep accurate records for home improvements?
You put energy, time and sweat into your house. While you may believe that all changes are truly home improvements, the IRS classifies it differently. Think of modifications in two ways: a) capital increases the home value, or b) repairs return it to its original state. According to IRS guidelines, capital improvements must add value, last for more than a year, extend its life, or adapt it to new uses.
Eligible Expenses: IRS Publication 523, on page 9, shows some allowable improvements. Think about some things you've changed since moving to your current house. When your family grew, you added a small bathroom for $5,000. If you paid $220,000, the $5,000 is added to the base price. This may be true with basement remodels, kitchen remodels, new windows - any major expense that increases the home's value.
Typical Repairs: These changes are usually considered in the realm of ongoing maintenance. Painting - most everyone decides to paint rooms to brighten or change color. It's similar to replacing a broken window - a repair and necessary for the upkeep of the house. If a few shingles blow off the roof and are replaced, that is considered repairs. However, if the entire roof needs to be replaced, that's a capital improvement.
Record Importance: Capital improvements may lower your tax bill when the house sells. Current tax laws allow home owners to add any "Capital" improvements to the total base price that they originally paid for the house, such as the example mentioned under eligible expenses in this article.
To look at how this type of improvement might affect the tax status, you must keep excellent records of what you paid for the house and paid receipts for any major improvements that added value to the residence. It's also an excellent idea to keep track of repairs for future owners. Wouldn't you appreciate this information if you were buying a house? How often was HVAC serviced? When did you install that new sink? It's like keeping service records for your car.
There are additional factors, which are best to discuss with tax professionals, such as short-term or long-term capital gains that factor in the length of time of occupancy.
It's necessary to keep records and understand the capital improvement tax rules. Remember a home project can be a capital improvement if it increases the value of the home. The pay-off for great records will come when you sell!
If I can help you with finding a contractor or finding your perfect home in Yukon, Shawnee, Edmond, or Oklahoma City, please contact me online, give me a call at 405-366-1111 or check out my website.
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