Don't Pay More Than You Should - How to Document Your Home Improvements Now and Avoid Double Taxation Later
by Jeff Riley, REALTOR® - NextHome Realty Center
Chances are your home is your biggest single investment, and like all your other investments you hope it appreciates in value. By the time you retire, you will have spent a lifetime building up your home equity - and making some strategic home improvements along the way.
When it comes time to sell the family home and tap the accumulated equity, you will need to know the true cost basis of the property - not just what you paid for the home all those decades ago.
If you get this calculation wrong, you could end up paying far more in taxes than you need to. While the IRS does provide a generous capital gains tax deduction for primary residences, the owners of rental homes and investment properties could find themselves facing a huge tax liability. Even if you are selling the family home and not an investment property, you could still face capital gains taxes if you have used up your allowance, not to mention the state taxes you could be facing.
That is why it is so important to keep careful records any time you work on your home. No matter how small the upgrade or how negligible the cost, keeping track of every expense is the best way to avoid double taxation.
Given the fact that a home is often a multi-decade investment, keeping track of those home improvement costs is not always an easy task. Even so, there are some things you can do to ease the burden and get the credit you deserve.
Make a List
If you are starting from ground zero, make a list of the home improvement projects you have already completed. Include as many details as you can remember, from the dates the home improvement projects were started and completed to how much they cost.
Hopefully you still have some of the original paperwork, including invoices from contractors, packing lists for materials and receipts for the supplies you purchased. Gather as much of the original paperwork as you can, then scan the original documents and save them to your computer - and your cloud account.
Lay It All Out
Once you know how much you have spent thus far on home improvements, it is time to lay it all out. Use a spreadsheet or other program to detail the costs you have thus far incurred, then save the file to your computer and the cloud.
Be sure to keep your home improvement cost spreadsheet updated as you move forward. The more accurate your records, the easier it will be to calculate your capital gains tax liability down the line.
Use Photos to Document Your Progress
Before you embark on any major home improvement project, take a few minutes to document how the property looks right now. Whether you are upgrading your kitchen, modernizing the home theater, installing a steam shower in the master bath or adding a man cave or she shed, it is important to document the work.
Taking before and after pictures could help you justify the home improvement costs you are claiming, but those photos could also prove invaluable if you need to make an insurance claim. The more documentation you have the better, so grab your camera and upload those photos to your cloud account.
When it comes to the roof over your head, it can seem like the payoff is still decades away, and in some cases that might be true. Whether you plan to tap your home equity to finance your retirement or dream of moving to a tropical location, the investment in your property matters. By accurately recording your home improvement projects and the costs involved, you can get the credit you deserve and avoid paying more in taxes than you should.