Do fix-up costs affect your capital gains calculation?


O

obwee

I have researched this topic all afternoon and have not
found a definitive answer. Perhaps someone here can help
me. The tax codes just confuse me!

In selling my primary residence, I am lucky enough to be
making more than the allowed exemption. I've already
increased my cost basis by totaling up various capital
improvements (remodels, new roof, new carpet) but still have
an excess. I plan to hire someone to do various "fix-up"
jobs to make the house more presentable (painting, planting,
fixing window runners, etc).

My first question is, can the cost of hiring out these last
minute "fix-ups" be used legitimately to reduce my net gain?
(None of these are capital improvements.)

My second question is, would replacing a seized jacuzzi
motor be considered a capital improvement? The jacuzzi is
inoperable without this "fix".

TIA
 
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L

Lanny Williams

I have researched this topic all afternoon and have not
found a definitive answer. Perhaps someone here can help
me. The tax codes just confuse me!

In selling my primary residence, I am lucky enough to be
making more than the allowed exemption. I've already
increased my cost basis by totaling up various capital
improvements (remodels, new roof, new carpet) but still have
an excess. I plan to hire someone to do various "fix-up"
jobs to make the house more presentable (painting, planting,
fixing window runners, etc).

My first question is, can the cost of hiring out these last
minute "fix-ups" be used legitimately to reduce my net gain?
(None of these are capital improvements.)

My second question is, would replacing a seized jacuzzi
motor be considered a capital improvement? The jacuzzi is
inoperable without this "fix".
Without more details, it is hard to say whether the "fix up
expenses" can be added to basis. I would say, however, that
replacing the jacuzzi motor is a repair, not a capital item.

The general rule is that capital items (that can be added to
basis and decrease your gain) are things that add to the
value of the property or extend its useful life. Repairs
(that do not add to basis but are current expenses) restore
value or useful life.

So, in the case of the motor, if it worked when you bought
the property or installed the jacuzzi, is merely restoring
the value or life. It would be hard to support a claim that
the property was more valuable because you replaced it. The
value had been there and you are just doing something to get
it back. Adding a new jacuzzi, on the other hand, creates
value and does add to basis.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans
 
S

Seth Breidbart

My first question is, can the cost of hiring out these last
They might be considered expenses of selling.
Without more details, it is hard to say whether the "fix up
expenses" can be added to basis. I would say, however, that
replacing the jacuzzi motor is a repair, not a capital item.

The general rule is that capital items (that can be added to
basis and decrease your gain) are things that add to the
value of the property or extend its useful life. Repairs
(that do not add to basis but are current expenses) restore
value or useful life.
What if the seized motor were replaced with an upgraded
motor (say, a more powerful one)?

Seth
 
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D

D. Stussy

I have researched this topic all afternoon and have not
found a definitive answer. Perhaps someone here can help
me. The tax codes just confuse me!

In selling my primary residence, I am lucky enough to be
making more than the allowed exemption. I've already
increased my cost basis by totaling up various capital
improvements (remodels, new roof, new carpet) but still have
an excess. I plan to hire someone to do various "fix-up"
jobs to make the house more presentable (painting, planting,
fixing window runners, etc).

My first question is, can the cost of hiring out these last
minute "fix-ups" be used legitimately to reduce my net gain?
(None of these are capital improvements.)

My second question is, would replacing a seized jacuzzi
motor be considered a capital improvement? The jacuzzi is
inoperable without this "fix".
"Fix-up costs" are those paid within 90 days of sale and are
usually mandated by the terms of escrow. As such, they
contribute to the COST OF SALE and thus affect any capital
gain in the same manner as any other cost of sale.

For the second question, you are returning a broken item to
working order, so that is merely a repair.
 

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