Home improvements aren't only about enhancing aesthetics or comfort—they're strategic investments that can boost the value of your home significantly. But did you know that tracking your home improvement costs can also potentially save you money during tax time?
The Importance of Tracking Your Home Improvement Costs
Tracking your home improvement costs has the potential to result in significant tax savings when you sell your home. When you make material improvements to your home, these costs can be added to the original purchase price of your home, also known as the 'cost basis'.
Reducing Potential Capital Gains Tax: The IRS defines the taxable profit from a home sale as the selling price minus the adjusted cost basis (adjusted cost basis = purchase price + improvement costs). By increasing your cost basis through improvements, your taxable profit when you sell decreases, potentially saving you in capital gains tax.
What Qualifies as a Home Improvement?
The IRS is specific about what can be added to your cost basis. It must be a substantial improvement that increases the home's value, prolongs its useful life, or adapts it to new uses.
Home improvement examples that may qualify:
On the other hand, costs for repairs or maintenance cannot be added to your cost basis.
Tips for Tracking Home Improvement Costs
By tracking your home improvement costs and understanding how they adjust your home's cost basis, you can potentially save a significant amount on taxes when you sell your home. Always consult with a tax professional to ensure you're accurately accounting for these improvements.
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