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Home Sale Tax Exclusion Question

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rated:
In the spirit of my analysis paralysis, and being prepared before the fact - I am doing a little bit of research on the home sale tax exclusion.

The rules, as I understand, is that appreciation of $250k/$500k are tax free as long as the house was our primary residence for at least 2 years in the last 5 years.

Is there any way to include carrying expenses of the house to increase the cost basis in this appreciation calculation?

e.g. during the course of home ownership, I would have spend money on:
1. Interest (minus the income tax deduction)
2. Taxes (minus the income tax deduction).
3. Maintenance. potentially ~1% of the home value every year.
4. Any improvements.

Is there any way to capture any of that in the cost basis calculation?
††

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rated:
Interest, no.
Taxes, no.
Maintenance, no.
Improvements, yes.

Costs of buying or selling, yes.

rated:
Are you aware of any guidelines as to what is considered improvement vs. maintenance?

e.g. we created a hedge fence by planting trees, is that improvement?
How about if we upgrade our electrical panel to 200A?
Upgraded locks for the doors?
...
...

You see - many of the costs are a gray area between maintenance vs. capital cost. How to know what is what and properly document?

When something is at the end of it's life, can I install a get a more version and call it improvement? That way it improves the value of the home, as well as improves the cost basis?

For clarification - none of this is likely to matter for me as I don't expect a $500k+ appreciation in our market in the foreseeable future. But it's good to know nevertheless .

rated:
Mostly, you can probably include all of those.

See page ~12 for details on basis adjustments:
https://www.irs.gov/pub/irs-prior/p523--2016.pdf
IRS said: Examples of improvements you CANíT include in your basis. You canít include:
- Any costs of repairs or maintenance that are necessary to keeping your home in good condition but donít add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.
-†Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced).
-†Any costs of any improvements with a life expectancy, when installed, of less than 1 year

rated:
puddonhead said:   Are you aware of any guidelines as to what is considered improvement vs. maintenance?

e.g. we created a hedge fence by planting trees, is that improvement?
How about if we upgrade our electrical panel to 200A?
Upgraded locks for the doors?
...
...

You see - many of the costs are a gray area between maintenance vs. capital cost. How to know what is what and properly document?

When something is at the end of it's life, can I install a get a more version and call it improvement? That way it improves the value of the home, as well as improves the cost basis?

For clarification - none of this is likely to matter for me as I don't expect a $500k+ appreciation in our market in the foreseeable future. But it's good to know nevertheless .

† "Created", "upgraded", "upgraded".† Those are improvements.† Fixing a fence is maintenance, and not capitalized because the the cost of obtaining the fence is already included in your cost basis (from either building the fence, or from buying the house that included a fence).† Building a new fence (even if you first discard an old fence) would be an addition to the property and is thus added to the cost basis*.

*To be hyper-technical, you would have to remove the value of the old fence you disposed of from your cost basis (that loss becomes a non-deductible expense), before adding the cost of the new fence to your basis.† Upgrading your electrical panel would be added to your cost basis, but the value of your old electrical panel would also be removed from your cost basis.† The improvement to be capitalized is only the incremental value that was added to the property from improving what was already there.

rated:
GodelianKnot said:   Mostly, you can probably include all of those.

See page ~12 for details on basis adjustments:
https://www.irs.gov/pub/irs-prior/p523--2016.pdf

That chart on page 12 is a pretty exhaustive list. I've always taken the approach that if wasn't on that list, the dollar amount was probably inconsequential in the long run. Any examples that could arguably be improvements but aren't on the list are most likely to be in the hundreds of dollars, not thousands, so the resulting tax impacts wouldn't be worth attracting the attention of the IRS. †I did just barely escape taxes on a home sale a few years ago by including a six figure remodeling job in the calculation of my basis, and I fully expected to hear from the IRS, but fortunately the call never came.

††

rated:
Irs really needs to update theses values. Fine for most fwfers but houses around me go up 250k every year.

rated:
baybau said:   Irs really needs to update theses values. Fine for most fwfers but houses around me go up 250k every year.
† Why should you get all those gains tax free? The point isn't to never pay taxes on primary residence sales, but to limit taxes paid in the normal course of broadly upward trending real estate markets in general. The problem being, if you have to pay taxes every time you buy/sell a house, just because all housing has appreciated a certain amount, you're going to constantly be losing value every time you move. That would significantly inhibit mobility, which is generally bad for society. If your particular market appreciates much faster than everyone else's (as it clearly is, if houses are up 250k/year), then you don't have this problem; your gains should be taxed as normal.

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