The housing market is strong right now in many parts of the country. Here’s a quick guide on how to determine your “basis” if you’re buying or selling a home.
The basics
An itemized deduction for real estate taxes and home mortgage interest can be claimed on your tax return, but many other home ownership costs aren’t eligible for deductions. However, these costs can still increase your home’s “basis,” or cost for tax purposes—which can save you taxes when you sell.
The law allows for all or part of the gain realized on the sale of your home to be excluded from income for tax purposes. Many homeowners may feel the exclusion amount makes keeping track of the basis relatively unimportant, since there is a general exclusion limit of $250,000—or $500,000 for married taxpayers—and many homes today sell for less than $500,000.
However, it’s important to take the possibility of future appreciation into account. Homes owned for 20 or 30 years often appreciate greatly, and keeping your basis as high as possible can allow you to reduce or avoid the tax that may result when you sell later on.
Keeping records
Your basis will establish the amount of your gain when you eventually sell—and you’ll need to prove the amount of your basis. As such, you’ll want to keep the following supporting documents for at least three years after you file the sale year’s tax return:
- Accurate records of expenses that increase your basis, including purchase price and closing costs
- Receipts and other records for additions and improvements made to the home
Determining basis
Purchase price is the main element of a home’s basis. Purchase price includes:
- Your down payment
- Any debt, such as a mortgage
- Certain settlement or closing costs
If your house was built on land that you own, your basis includes the cost of the land in addition to some of the costs to complete the house.
The cost of home expenses paid in connection with the purchase, including attorney’s fees, recording fees, abstract fees, transfer taxes, and owner’s title insurance are added to the basis. The basis of your home is affected by depreciation if your home was used for business or rental purposes and by expenses after a casualty to restore damaged property.
The cost of certain additions and improvements should also be added to the basis for your home. Improvements that add to basis include:
- Adding a room
- Finishing a basement
- Building a fence
- Installing storm doors or windows
- Replacing flooring
- Adding new roofing
- Paving a driveway
- Installing a new heating or central air conditioning system
Home expenses such as painting, repairing leaks, fixing gutters, and replacing broken windows don’t add much to the home’s value or the property’s life and are considered repairs rather than improvements. As such, they can’t be added to the property’s basis. However, if items that would otherwise be considered repairs are done as a part of extensive remodeling, the entire job is considered an improvement and adds to the home’s basis.
Generally speaking, appliances only add to your basis if they are considered to be attached to the house—so an appliance that can be easily removed won’t increase basis, but the cost of a built-in oven or range will.
Contact us today
Other rules and requirements might apply to your home’s basis. Contact us today to plan for the best tax results.