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How to Deduct Home Improvement Costs on a Sold House

by Monica Dillon

If you've sold your primary home recently you may be wondering if you will have to pay taxes on any net profits from the sale. You may also be wondering if you can deduct the cost of home improvements you made while owning the home. The good news is you can. By adding the cost of improvements to your original cost of the home and finding the adjusted cost basis of your home, you can deduct home improvement costs from the final sale price of the home.

Determining Your Home's Cost Basis

Review the original purchase price of your home from your original closing documents.

Review IRS Publication 723 for a list of typical eligible home improvements.

Estimate the costs of those home improvements for which you don't have physical receipts or documentation. Total the costs of all other eligible documented improvements.

Add the total home improvement costs to the original purchase price of the home. The IRS refers to this as your adjusted cost basis.

Find the realized price of the home by deducting any selling expenses such as commissions, legal and advertising fees. Review Publication 523 for a comprehensive list of eligible expenses.

Find the final loss or gain of your home sale by deducting the home's adjusted cost basis from the realized amount of the home.

Find the net gain or loss on the sale of your home by subtracting the cost basis from the final sale price of the home.

Items you will need
  • Closing documents from both the original purchase and sale of your home
  • IRS Publication 523
  • A list of all home improvements and renovations to the home
  • Cancelled checks, receipts, invoices, and contracts from home improvements
  • A list of selling expenses you've incurred in selling the home

Tips

  • The IRS refers to the home's realized amount as the selling price minus expenses. The IRS allows you to deduct expenses from the sale of the home including legals fees and commissions.
  • You may not have documentation or proof of a renovation, but you may still add legitimate home improvements to the original cost basis of the home.
  • The IRS will allow you to exclude up to $250,000 in gains from your income or $500,000 if you file jointly with your spouse.
  • Depending on the realized amount from the sale, you may not be required to document the sale of the home on your taxes if you fall within the IRS excluded amount.

Warnings

  • The IRS gives strict guidelines regarding the definition of what defines a primary home. You must have lived in and used the home in at least two of the five years preceding the home's sale in order to take advantage of the gain exclusions.
  • If you have excluded gain from another home within 2 years of the current sale, the IRS will not allow you to use the gains exclusion.
  • Do not add routine maintenance costs or repairs. The IRS states home improvements must "add to the value of your home, prolong its useful life, or adapt it to new uses."
  • Don't include home improvements that have been replaced or removed.

About the Author

Monica Dillon has more than 10 years experience in real estate sales, marketing, investing and appraising. She specializes in energy efficiency building practices and renewable energy. Dillon has been syndicated by the National Newspaper Publisher's Association. Her work has also appeared in the "Journal Of Progressive Human Services."

Photo Credits

  • Creatas/Creatas/Getty Images