Do you track home improvements for tax basis?

[simpsongal]

Dh mentioned this to me. We’re fortunate that we’d likely clear more than $500k if we sold in a few years and far more if we sell closer to retirement. I know you can exempt $500k appreciation in a home if you’re married. Dh mentioned you can step up your purchase basis with certain home improvements. So if you buy for $500k, put on a $200k addition, your new basis is $700k.

Anyway, we might start keeping a file of contracts , receipts, and canceled checks. Dh mentioned capital gains is about 43% (eta - sorry, it would be 43% under Biden’s new plan).

Wanted to see if others are doing this or put it on y’all radar.

[sicilygirl]

Yes, we do this too. We don’t track smaller things (that would be categorized as repairs or maintenance), but anything considered an improvement, for sure.

Are you saying he mentioned that the capital gains tax rate is 43%? He must be talking about the proposal under Biden’s tax plan to eliminate the capital gains rate and make the gains taxable at ordinary rates.

Right now, capital gains are taxed at 15% for those with taxable income between about $80k and $415k, 0% for those below that income level, and 20% for those above.

And then the Net Investment Income Tax is another 3.8% for those whose modified AGI is above $250k. (All of these numbers are for Married Filing Joint taxpayers).

[tealblue]

I doubt we would never clear $500k In addition to our purchase price (LCOL)... but I did start and sometimes update an excel spreadsheet with improvements as we bought a fixer upper. I have binders full of receipts, paint colors, samples, etc of all the things we’ve done to our house. Just as a tracker for myself (as I sometimes like to cry at the amount we’ve spent here 😭) but in case we ever happened to sell for more than the exemption amount.

[konapoppy]

Yes, I track these - for example, we put in overhead lights in the bedrooms, are redoing the bathroom, redid the roof and fence, etc. I also keep a tab for things like wall paint colors, light bulbs for different fixtures, and purchases that don’t count as improvement.

[sometimesrunner]

I wish I had the need for this. 😥😥

[sandandsea]

We track big projects like the new master bathroom and hardwood floors and the landscape project. Day to day stuff we don’t.

[kylerules]

I had no idea about this rule. I must live under a rock. The way I understand it though, if you bought your home for 200k and end up selling it for 550k- you would owe nothing as a married couple, bc the gain is less than 500k. Is that right?

[fryjack2]

Yes, we do.

[simpsongal]

May 9, 2021 5:45:20 GMT -5 kylerules said:

I had no idea about this rule. I must live under a rock. The way I understand it though, if you bought your home for 200k and end up selling it for 550k- you would owe nothing as a married couple, bc the gain is less than 500k. Is that right?

yes, married couples can earn $500k appreciation tax free on the sale of your primary home, it’s $250k for single folks. Your basis for calculating your gain is your purchase price, but you can increase/reset that number by adding up improvements. It makes sense bc the improvements are not just a gain, it’s money you spent to increase the value of your home.

[gt7301b]

We don’t but we are going to do some significant upgrades this year so I guess it wouldn’t hurt to start keeping track. It seems crazy to think our house could appreciate more than 500k, but homes in our neighborhood are going for 10-15% above list so it could happen in the distant future when we sell.

[lemoncupcake]

What are you keeping as proof of your improvements - just the #s or copies of receipts/invoices?

[puppylove64]

We don’t because the col is low here and we would never clear $500k. But I probably would if that were a more likely scenario

[carmenere]

May 8, 2021 11:52:24 GMT -5 simpsongal said:

Dh mentioned this to me. We’re fortunate that we’d likely clear more than $500k if we sold in a few years and far more if we sell closer to retirement. I know you can exempt $500k appreciation in a home if you’re married. Dh mentioned you can step up your purchase basis with certain home improvements. So if you buy for $500k, put on a $200k addition, your new basis is $700k.

Anyway, we might start keeping a file of contracts , receipts, and canceled checks. Dh mentioned capital gains is about 43% (eta - sorry, it would be 43% under Biden’s new plan).

Wanted to see if others are doing this or put it on y’all radar.

Last I heard, the proposed increase in cap. gains would only apply to taxpayers with income over $1M. Is that not the case?

[numbers]

Yes, because we've done massive whole-house renovations on all of our 3 houses that we've owned.

I keep a spreadsheet and track date, contractor, amount, description for each significant improvement.

[simpsongal]

May 10, 2021 7:31:15 GMT -5 carmenere said:

May 8, 2021 11:52:24 GMT -5 simpsongal said:

Dh mentioned this to me. We’re fortunate that we’d likely clear more than $500k if we sold in a few years and far more if we sell closer to retirement. I know you can exempt $500k appreciation in a home if you’re married. Dh mentioned you can step up your purchase basis with certain home improvements. So if you buy for $500k, put on a $200k addition, your new basis is $700k.

Anyway, we might start keeping a file of contracts , receipts, and canceled checks. Dh mentioned capital gains is about 43% (eta - sorry, it would be 43% under Biden’s new plan).

Wanted to see if others are doing this or put it on y’all radar.

Last I heard, the proposed increase in cap. gains would only apply to taxpayers with income over $1M. Is that not the case?

Yes, that's correct.  So the tax might be lower on the proceeds of the sale, it'll depend on your particular tax bracket.  I think DH mentioned that the proceeds from the sale of your home would increase your income for the year (I'd have to double check that).  So if you make $200k/yr but sold a home for a $700K gain, that could put you in a pretty substantial $900K tax bracket.  I'm still navigating this though, so I'm not sure if that gain on the sale of the home would be included as your ordinary income for tax bracket purposes.  

[simpsongal]

May 9, 2021 14:20:51 GMT -5 lemoncupcake said:

What are you keeping as proof of your improvements - just the #s or copies of receipts/invoices?

numbers , since you're tracking, have you done any research on what's required?  I need to look into it. 

DH and I were thinking of putting a file together w/cancelled checks, contracts for major improvements, etc.  But it's a bit of a mixed bag/patchwork.  And I'm not quite sure what "counts" - as OP said, I don't think wear/tear does, so maybe not a new roof?  You could look at our listing photos from 9 yrs ago and photos today, including permits we pulled for renovations, and surmise we've spent a good deal updating our home.

[carmenere]

May 10, 2021 7:43:40 GMT -5 simpsongal said:

May 10, 2021 7:31:15 GMT -5 carmenere said:

Last I heard, the proposed increase in cap. gains would only apply to taxpayers with income over $1M. Is that not the case?

Yes, that's correct.  So the tax might be lower on the proceeds of the sale, it'll depend on your particular tax bracket.  I think DH mentioned that the proceeds from the sale of your home would increase your income for the year (I'd have to double check that).  So if you make $200k/yr but sold a home for a $700K gain, that could put you in a pretty substantial $900K tax bracket.  I'm still navigating this though, so I'm not sure if that gain on the sale of the home would be included as your ordinary income for tax bracket purposes.  

That makes sense. It sounds like in your situation you'd qualify for the exemption on the first $500K in cap gains, assuming it's your primary residence, but it may still push you into a higher bracket for the year?

[janegold]

Oh gosh, thanks for this thread everyone. This isn't something that was on my radar but we need to start doing it. Our house just appraised for over $200k more than we paid for it last year without any major improvements, and we are planning a substantial remodel soon.

What do people consider a significant improvement for tracking purposes?

[sicilygirl]

May 10, 2021 7:43:40 GMT -5 simpsongal said:

May 10, 2021 7:31:15 GMT -5 carmenere said:

Last I heard, the proposed increase in cap. gains would only apply to taxpayers with income over $1M. Is that not the case?

Yes, that's correct.  So the tax might be lower on the proceeds of the sale, it'll depend on your particular tax bracket.  I think DH mentioned that the proceeds from the sale of your home would increase your income for the year (I'd have to double check that).  So if you make $200k/yr but sold a home for a $700K gain, that could put you in a pretty substantial $900K tax bracket.  I'm still navigating this though, so I'm not sure if that gain on the sale of the home would be included as your ordinary income for tax bracket purposes.  

Only the taxable portion of the gain is considered when determining your income for purposes of tax brackets.

You should keep your original settlement statement from when you purchased your house, as well as receipts/cancelled checks for improvements.  Check out p. 12-13 of Pub. 530 for more information on how to track your basis over time as there are things that can cause it to decrease as well (though those are more unusual).  Generally, improvements are anything that results in the betterment of the property, restores the property, or adapts it for a new or different use.  

ETA: One other thing to keep in mind is that you should also add selling expenses to your basis to reduce the gain when you sell.  For houses that potentially have a taxable gain, those can be significant since they include things like realtor commissions.

[k3am]

We didn’t keep great track of it on the old house. We sold for $600k over what we paid and we’re able to pull up enough in invoices for our renovations to bridge $100k (we spent ~$100-$150k on) and that was fine.

For the new house, I have an excel spreadsheet (what it was, vendor, and price) and I save everything to an email folder.