Determining My Home Basis – Not As Dry As It Sounds
Since it’s tax season, now is a good time to make a new file called Home Basis.
Here’s what you put in it:
- The HUD-1 (closing statement) from when you bought your home.
- Receipts for anything you do to improve your home.
In Washington State, a married couple can have a tax-free profit on the sale of their principal residence up to $500,000, a single person can have $250,000. While that might seem like more profit than you might have or hope to have, things can change and make a big difference if, say a couple now becomes a single, or if the home has been owned a long time and seen a lot of appreciation.
What counts as an improvement?
The IRS definition of a home improvement is that it meets one of the following:
- Materially adds to the value of your home
- Prolongs its useful life
- Adapts it to new uses
You can’t add any value for your labor. If something was replaced twice, like a water heater, you can only claim it once. And it seems obvious, but the improvement has to stay, you can’t include a hot tub in the basis and take it with you when you sell.
There is a difference between an improvement and a repair, and it can be a little gray. Painting the first time is an improvement, painting the rest of the time is maintenance and therefore a repair.
Some improvement items:
- Any addition – bedroom, bath, studio, etc.
- Lawns and grounds, sprinklers, fences, walkways
- Heating and air-conditioning
- Lighting, wiring upgrades
- Plumbing – water heater
- Finishing the basement or other space
- New roof
- Paving the driveway
- Fireplaces, central vac, flooring upgrades
- Satellite, dish, security system
- Insulation -floor, attic, pipes
- Patio, deck, porch, spa, pool
This is one of those things that is easy to do and easy not to do. If you have a file, it’s easy to throw any improvement receipts in it and then don’t worry about it until you sell.
You don’t know what changes could take place in your life or in the real estate market, that will make it extremely important for you to have this information. Go make the file!