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Home Improvements: Raise The Tax Roof

(posted: December 1st, 2017)

If you're improving your home, say, putting in a deck or finishing a basement, a little forethought can provide huge tax savings.

Strategy:
Keep detailed records of home improvements.

The costs aren't deductible, but they can be added to the home's basis, thereby reducing the taxable gain on a future sale. Good recordkeeping helps maximize the benefits of the home sale gain exclusion. For a home owned and used as your principal residence at least two years out of the five-year period ending on the sale date, joint filers can exclude from federal income tax up to $500,000 of gain ($250,000 for single filers).

Example:
You and your spouse bought your home 15 years ago for $400,000.

In 2017, you add a swimming pool, patio and landscaping for $100,000. Then you sell the home for $990,000.

Because your basis has increased by $100,000 your gain is $490,000, so it's completely sheltered by the $500,000 home sale gain exclusion. Without records, you would have been taxed on a $90,000 gain ($590,000 gain - $500,000 exclusion).

This tax-saving tactic becomes even more critical when you factor in the current 3.8% tax on "net investment income" (NII). For instance, assuming you must pay the maximum 20% capital gains rate on a $90,000 capital gain plus the NII tax in 2017, you would have to fork over $21,420 (23.8% of $90,000) to Uncle Sam.

Tip: Continue to maintain records of past improvements used to increase basis.

We're here to help. If you have questions about how your home improvements can affect your taxes, please Contact Us

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