Article Highlights:
Many taxpayers believe that keeping home repair records is unnecessary because the possible gain when they sell their property will never exceed the amount of the tax code's exclusion for home gains, as is discussed below.
Under the present tax rules, you can deduct up to $250,000 ($500,000 for married couples) in gain from the sale of your primary house if you owned and resided in it for at least two years (24 months) of the previous five years. You cannot have previously used a home-sale exclusion during the two years preceding the transaction. If you meet these time restrictions, you can utilize the exclusion as many times as you choose; however, extenuating circumstances may reduce the amount of the exclusion. The home-sale gain exception only applies to your primary residence, not a second house or leased property.
As previously stated, you must have used and owned the residence for at least two of the five years immediately preceding sale. The years do not have to be consecutive or closest to the sale date. Vacations, short absences, and short rental terms do not shorten the use period. To qualify for the $500,000 exclusion if you are married, both you and your spouse must have used the home for two of the five years preceding the sale, but only one of you must be the owner. When only one spouse in a married pair qualifies, the maximum exclusion is $250,000, not $500,000.
If you do not meet the ownership and use requirements, you may be eligible for a prorated exclusion amount in certain circumstances. An example of this would be if you were forced to sell your house due to extenuating circumstances, such as a job relocation, a health issue, or other unforeseen events. Another rule extends the 5-year timeframe to include military deployments and certain other government personnel. If you have not met the two out of five rule, please contact our office to see if you are eligible for a reduced exclusion.
But what if your house selling gain exceeds the home sale exclusion? Then it is in your best interests to keep home improvement records, because the expenses of upgrades can be added to the home's purchase price and used to calculate the gain. So, even if you merely preserve the receipts for the modifications in a folder or a shoe box, they may come in handy later when you sell your home.
Here are some scenarios in which possessing home improvement records could save taxes:
(1)The residence has been owned for a long time, and the combined value gain from inflation and upgrades surpasses the exclusion amount.
(2)The home is transformed into a rental property, and the cost and renovations to the home are required to determine the property's depreciable basis.
(3)The home is turned into a second residence, therefore the exclusion may not apply to the sale.
(4)You suffer a casualty loss but keep the home after completing repairs.
(5)The home is sold before completing the two-year use and ownership criteria.
(6)The home is only eligible for a limited exclusion since it was sold before completing the two-year use and ownership requirements.
(7)After a divorce, one spouse maintains the residence and is only eligible to a $250,000 exclusion rather than the $500,000 exclusion granted to married couples.
(8) Future tax law changes may impact the exclusion levels.
Everyone dislikes keeping records, but consider the ramifications if you make a profit and some of it cannot be removed. You will be taxed on capital gains (CG), and there is a significant likelihood that the CG tax rate will be greater than usual simply because the gain moved you into a higher tax band. Before deciding not to keep records, carefully examine the possibility of a gain greater than the exclusion limit.
property upgrades encompass almost everything that increases the value of the property, from large-scale projects like remodeling a kitchen, adding another room or a swimming pool, and landscaping to tiny items like ceiling fans. However, some home upgrades are either not included in the cost of home improvements or are only partially included. Examples include tax incentives for residential solar, energy-efficient home upgrades, and tax deductions for handicap improvements. Furthermore, the costs of ordinary maintenance or repairs, such as fixing leaks, painting (interior or exterior), and replacing broken hardware, are not considered upgrades.
If you have any questions concerning the home gain exclusion or how keeping home improvement records may effect you, please call this office.