I just read this on Turbo Tax.com and thought is was great to post for sellers...
If you make a profit when you sell your house, you will owe taxes on any capital gain above a certain amount. But how do you figure out if you have what the IRS considers a capital gain?
You take everything you paid for the house, the original purchase prices, sales taxes, fees, and so on, and add the cost of all the improvements you have made over the years to get a grand total, which is known as the "cost basis". Compare the cost basis with the money you get for the house and if you've made a profit, that gain may be taxable (if it is more than $250,000 for an individual or $500,000 for a married couple filing jointly). Alas, capital losses on personal residences are not deductible.
You can see it makes sense to keep track of whatever you spend to fix up, expand, or repair your house, so you can reduce or avoid taxes when you sell.
Tips
- Make a special folder to save all your receipts and records for any improvements you make to your home.
- If you've lived in your house for many years, and if area housing prices have been gradually going up over all those years, you may be facing a fairly large gain that would be minimized by including the improvements in the cost basis of the house.
- If you operate a business from your home or rent a portion of your home to someone, you may be able to deduct part of your home improvements as business expenses through depreciation.
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