- Find out why you should keep home improvement records.
- Learn about home gain exclusion amounts.
- Find out why records may be required to avoid tax.
Individuals who meet the 2-out-of-5-year use and ownership tests can exclude up to $250,000 ($500,000 if both filer and spouse qualify) of gain from the sale of their home, and generally don’t need to keep home improvement records. However, in many instances the gain from the home’s sale can be substantially higher than the allowable exclusion amount; having a record of improvements can be very beneficial and lead to tax savings.
How home improvement records could save taxes
Here are some situations when having home improvement records could save taxes:
(1) You own 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 convert 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 convert 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 sold the home before meeting the 2-year use and ownership requirements.
(6) The home only qualifies for a reduced exclusion because you sell 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) There are future tax law changes that could affect the exclusion amounts.
Everyone hates to keep records. However, consider the consequences if you sell your home at a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG). Also, there is a good chance the CG tax rate will be higher than normal because the gain pushed you into a higher CG tax bracket. Before deciding not to keep home improvement records, consider having a gain in excess of the exclusion amount.
As to what home improvement records to keep, we aren’t saying you need to keep the receipt for every time you buy a can of paint or replace a ripped screen (these wouldn’t be eligible as improvements). But you should maintain receipts, invoices, contracts, etc., and cancelled checks, credit card receipts or bank records to prove payments when you make improvements such as adding a room, putting on a new roof, and remodeling the bathroom.
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. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!