Should You Be Keeping Home Improvement Records?

• Find out why you should keep home improvement records.
• Learn about home gain exclusion amounts.
• Learn how good recordkeeping may help you avoid tax.

Many taxpayers don’t feel the need to keep home improvement records. They think the potential gain will never exceed the amount of the tax code’s exclusion for home gains explained as follows.

Under the current version of the tax code, you are allowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 of the 5 years before the sale. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion if you meet these time requirements; however, extenuating circumstances can reduce the amount of the exclusion. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property.

Homeownership and Use Requirements

As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences, and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion drops to $250,000 instead of $500,000.

If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you must sell the home because of extenuating circumstances, such as a job-related move, a health crisis, or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Haven’t met the 2 out of 5 rule? Call your Fiducial representative to see if you qualify for a reduced exclusion.

Home Improvement Records Are Important

But what if your home sale gain exceeds the home sale exclusion? Then it is in your best interests to keep home improvement records. Even if only keeping the receipts for the improvements in a folder or a shoe box.

Here are some situations when having home improvement records could save taxes:

(1) You have owned the home for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount.

(2) You have converted the home to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property.

(3) You have converted the home to a second residence, and the exclusion might not apply to the sale.

(4) You suffer a casualty loss and retain the home after making repairs.

(5) You sell the home before meeting the 2-year use and ownership requirements.

(6) The home only qualifies for a reduced exclusion because you sold the home before meeting the 2-year use and ownership requirements.

(7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples.

(8) Future tax law changes could affect the exclusion amounts.

The Consequences of Poor Recordkeeping

Everyone hates to keep records. However, you should consider the consequences if you have a gain and a portion cannot be excluded. You will be hit with capital gains (CG). Unfortunately, there is a good chance the CG tax rate will be higher than they would be otherwise simply because the gain pushed you into a higher CG tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain more than the exclusion amount.

Home improvements include just about anything that will increase the value of the home. Imagine big-ticket items like swimming pools and landscaping all the way to smaller items like ceiling fans. But there are some home improvements that cannot be included in the cost of home improvements for the purpose of increasing basis. Those include items that qualify for tax credits such as home solar, home energy efficiency improvements, or those that are claimed as tax-deductible expenses such as handicap improvements.

Have questions related to the home gain exclusion or questions about how keeping home improvement records might directly affect you? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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