Turning Home Receipts into Savings
When you sell your home, one of the most important financial aspects to consider is the capital gains tax -- a tax on the profit you make from selling an asset. Often neglected is that if you’ve made improvements to your home over the years, you may be able to reduce or even eliminate this tax by increasing your cost basis. To do this, you’ll need proof of those expenditures -- keeping your receipts is essential.
For homeowners in the Pacific Northwest, particularly in Washington state, there are additional considerations unique to the region. From managing heavy rainfall to preparing for seismic activity, some home improvements can increase your cost basis while addressing the specific challenges of the area.
Understanding Cost Basis and Capital Gains
The cost basis of your home is essentially what you paid for it, plus certain costs and improvements. When you sell, your capital gain is the difference between the selling price and your adjusted cost basis.
Let’s break it down:
- Purchase Price: This includes the amount you paid for the home, including closing costs such as title fees, transfer taxes, and recording fees.
- Improvements: Certain home improvements -- such as a new roof, added rooms, or landscaping -- can be added to your cost basis. Unfortunately, maintenance and repairs (like fixing a broken window or repainting) typically cannot be added to the basis.
- Selling Costs: When it’s time to sell, certain costs related to the sale -- like real estate commissions and legal fees -- can also reduce the capital gain.
Why Receipts Matter
To justify any adjustments to your cost basis, the IRS requires proof. This means you need to keep receipts, invoices, and records of all eligible improvements. Without them, you could end up paying more in taxes than necessary.
For example, if you spent $50,000 adding a new kitchen and another $20,000 on landscaping, that $70,000 can increase your cost basis -- reducing your potential capital gains when you sell. If you didn’t have the receipts to prove those improvements, you could miss out on significant tax savings.
Tax Exclusion Rules for the Sale of a Home: When Capital Gains Don’t Apply
The IRS allows you to exclude a portion of your capital gains under certain conditions:
- $250,000 exclusion for single filers
- $500,000 exclusion for married couples filing jointly
To qualify, you must have:
- Owned the home for at least two of the past five years
- Lived in the home as your primary residence for at least two years out of the last five
If your gain from the sale exceeds these exclusion limits, you’ll owe capital gains tax on the excess amount. This is where increasing your cost basis becomes especially important, as it could keep you under the exclusion threshold or minimize the tax you owe.
What Counts as a Home Improvement?
Only certain types of work on your home are eligible for cost basis increases. Examples include:
- Home additions: New rooms, a finished basement, or second floors
- Major systems upgrades: Replacing the roof, plumbing, heating, or electrical systems
- Energy-efficient improvements: Solar panels, new windows, or insulation upgrades
- Landscaping: Installing a swimming pool, adding a patio, or significant landscaping overhauls
What Doesn’t Count as a Home Improvement?
Not all expenses related to your home can increase your cost basis. Here’s what doesn’t count:
- Routine appliance replacement: Replacing standard appliances like refrigerators, dishwashers, or ovens typically doesn’t qualify as a home improvement that increases your cost basis. However, if the appliance upgrades are part of a larger remodeling project, such as a complete kitchen overhaul, they may be considered capital improvements.
- Routine maintenance and repairs: Painting, fixing leaks, replacing broken windows, or repairing appliance.
- Short-lived improvements: Installing new carpets, curtains, or other easily replaceable items
- Homeowners association (HOA) fees: Monthly or annual HOA dues, even if used for property upkeep.
- Mortgage interest and property taxes: These are deductible on annual taxes, but don’t affect your cost basis. Similarly, home insurance premiums and utility costs do not increase cost basis.
Unique Considerations for Pacific Northwest Homeowners
Homeowners in the Pacific Northwest, especially in Washington, face unique environmental conditions that may require specific types of improvements. Certain upgrades to your home not only improve its value but can also increase your cost basis for tax purposes. Here are some examples unique to the region:
- Septic system installation or upgrade: In many rural areas of Washington, homes rely on septic systems rather than city sewer connections. Installing or upgrading a septic system is a significant home improvement that can increase your cost basis.
- Moss and mildew-resistant roofing: Due to the damp climate in the Pacific Northwest, roofs are prone to moss, algae, and mildew growth. Replacing your roof with moss-resistant materials can be considered a capital improvement, as it increases the longevity and value of your home.
- Fire-resistant materials: With increasing wildfire risks, especially in certain areas of Washington, upgrading to fire-resistant siding or decking is another improvement that can enhance your home’s safety and longevity. These materials not only protect your property but also increase your cost basis.
- Rainwater management systems: In areas with heavy rainfall, installing drainage systems, French drains, or rainwater collection systems can help prevent water damage. These improvements count toward your cost basis, especially if they prevent flooding or major property damage.
- Seismic retrofitting: Washington lies in a seismically active region. If you’ve made upgrades to reinforce your home -- such as bolting it to the foundation or installing seismic straps -- these count as a capital improvements that increases your cost basis.
How to Organize Your Receipts
The key to benefiting from home improvement tax breaks is having good records. Here are some tips:
- Keep digital copies: Scan receipts and invoices and store them in a cloud folder for easy access.
- Use a spreadsheet (e.g., Google Sheets, Microsoft Excel): Track the date of the improvement, what was done, and how much you spent. Useful categories include: Transaction Date, Amount, Vendor, Description, Category, Payment Method, Invoice Number, Warranty Information, Completion Date, and Comments.
- Organize by year: If you own your home for decades, this will help you quickly reference and total your improvements by year.
What Happens if You Don’t Keep Receipts?
If you don’t keep detailed records of your home improvements, the IRS may deny your cost basis claims in an audit. That means you could miss out on thousands of dollars in tax savings -- potentially paying taxes on profits you didn’t actually make.
The Bottom Line
Maintaining home receipts isn’t just about keeping things neat -- it’s a sSave Postmart financial move that can lead to significant tax savings when you sell your home. By carefully documenting your improvements, you can increase your home’s cost basis, reduce your capital gains, and potentially eliminate your tax liability.
Whether you’ve just bought your home or have lived in it for decades, start organizing your receipts now. When the time comes to sell, you’ll be glad you did.