Personal Finance Advice

A few weeks ago, I discovered a hardware store receipt among some papers my in-laws had given us. Because my father-in-law works in maintenance, I called them to see if he needed the receipt for reimbursement from his job. No, my mother-in-law told me, it wasn’t a work expense; it was the receipt for their new garage door. “But save it, anyway,” she said. “We’re keeping receipts so that when we’re gone and our kids have to sell the house, they can deduct home improvement expenses.” She added that she was a bit concerned, however, about some of the receipts from 1979 and 1980, as they were beginning to fade.

I have done our family’s taxes for the past seven or eight years, itemizing our deductions, and I never saw anything about deducting home improvement expenses, so I searched the IRS website for information on it. A call to the IRS confirmed my belief that no separate, itemized home improvement deduction exists. My in-laws are wise, however, to save their receipts, provided they include notes about what purchase each receipt documents (the one I discovered did not say it was for a garage door) because home improvements can act like a deduction when they are added to the original purchase price of the house to figure the cost basis for the profit or loss from the sale of the house. Here’s how it works:

If I buy a house for $200,000 and spend $50,000 remodeling it or adding to it, my cost basis is $250,000. If I sell the house for $300,000, I then have to pay taxes only on $50,000 of profit, not $100,000. I cannot directly deduct the $50,000 from my income in the year I remodel (or in the year I sell), but the money spent on improvements will lower the percentage of the sale on which I am taxed. Conversely, if potential buyers don’t like what I’ve done to the house and I can resell it for only $200,000 (or less), I can report a loss on the sale.

Home improvement expenses, however, must be used for making substantial improvements to the home – improvements that would last longer than a year and would likely increase the value of the home. General repairs and home maintenance expenses, such as painting, do not count. Nor do improvements that have been removed before the house is sold (so those receipts from 1979 and 1980 may be irrelevant, anyway).

By keeping track of all the work they have done on their house, my in-laws have prepared for its eventual sale better than most people have. Nevertheless, their diligence may not pay off in the long run. If they do indeed keep their house for the rest of their lives (which they currently plan to do), their heirs will most likely use the fair market value of their house at the time of their death, rather than their actual costs, as the basis for taxes on the sale of their home.

Photo Credit: dogwelder