Should You Be Saving Those Home Improvement Receipts?

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.

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7 Responses to Should You Be Saving Those Home Improvement Receipts?

  1. Karen says:

    I’m just curious, does the IRS require paper receipts, or would scans (saved on your computer) be acceptable? How about entries in a spreadsheet or a program like Quicken? It doesn’t really apply to me yet, since I don’t own a home, but just wondering.

  2. Stein says:

    I don’t know that this advice is sound. Using his example, if you make $50k on your house, you don’t pay a penny of taxes as long as you have lived there 2 of the last 5 years (250k is exempt for singles and 500k for married couples). If you are going to make more than that on your house, it may make some sense to track the larger things.

    If you inherit property, your basis is the fair market value at the time of transfer, regardless of what was paid or improved, and unless you are inheriting a huge estate, you won’t pay taxes on that either.

  3. Mike D. says:

    Stein is correct,if you have lived there at least 2 years you are wasting your time tracking expenses.

  4. Morfydd says:

    One other reason to keep your receipts is that for states that allow you to deduct sales tax in lieu of state income tax, it is calculated as either:

    –As found on all receipts for the year

    OR

    –A generic number based on your AGI, PLUS tax paid on new vehicles PLUS tax paid on home improvement materials. (No labor costs allowed.)

    In the second case (which almost everyone who itemizes in Washington State chooses), it’s worth a few bucks to save even small home improvement receipts.

  5. Garran says:

    In your scenario there would be no tax on the sale of your house, provided it is your principal residence.
    You receive a principal residence sale exclusion of $250,000 ($125,000 if single), therefore your taxes would be computed ONLY on the profit in excess of the exclusion.

    You are correct in which any improvements will add to the basis of the property.
    If the property is owned jointly by husband and wife, upon the death of either party the survivor can elect for a Step-Up Basis Valuation adjustment to bring their interest up to market value.

  6. Garran says:

    In your scenario there would be no tax on the sale of your house, provided it is your principal residence.
    You receive a principal residence sale exclusion of $500,000 ($250,000 if single), therefore your taxes would be computed ONLY on the profit in excess of the exclusion.

    You are correct in which any improvements will add to the basis of the property.
    If the property is owned jointly by husband and wife, upon the death of either party the survivor can elect for a Step-Up Basis Valuation adjustment to bring their interest up to market value.

  7. John says:

    Agree with this article. If you have lived there for more that 2 years there really is no point to keeping all those records.

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