Home improvements to reduce profit from home sale?


R

rick m

I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?

2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).

Thanks,
Rick
 
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J

joetaxpayer

rick said:
I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?

2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
You are correct, paint doesn't count (toward home
improvement cost). I don't see why permanent light fixtures
would be excluded. If you upgraded from a 49 cent pull chain
to a $750 chandelier in a dining room, and that fixture is a
ceiling mount (i.e. permanent) that is an improvement.

JOE
 
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M

Mike Wellman

rick said:
I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?

2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
Yes, improvements can reduce the profit. However, assuming
this is your primary residence, you can have a profit of up
to $500,000 (married couple) without incurring any tax
liability. There are things that can complicate this - like
having deducted home-office expenses or prior rental of it -
but generally none of the gain is taxable up to the $500,000
limit.
 
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B

Bill Brown

rick said:
I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?
Yes, the cost of improvements increase your basis in the
home and reduce your realized gain.
2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
Right.

If the home has been your primary residence and you have
owned it for 2 of the 5 years ending on the closing date you
can exclude up to $250,000 of gain ($500,000 on a joint
return where the spouse meets the 2 of 5 primary residence
test).
 
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B

Bill

(e-mail address removed) (rick=A0m) posted:
I've looked around and can't find an answer to
this.
We've been in our home since 1992 and plan
on selling in the spring of 2007. Values here
have appreciated quite a bit. Anyway, we were
keeping receipts for work done on the house.
The questions:
1) Can we use these receipts to reduce the
profit on the home sale?
Actually, you would use them to increase your _cost basis_
.... which will also reduce your net profit on the
transaction.
2) What does or doesn't qualify for this? I
thought that improvements counted - like if we
redid the kitchen and put in upgraded cabinets
it would count but stuff like paint and light
fixtures wouldn't since their purchase was part
of a home repair (you have to paint once in a
while, and light fixtures do go south).
You've got the basics right: Maintenance expenses are not
to be included as "improvements" ... but additions or
upgrades are OK. See Pub 17, Chapter 15, "Selling Your
Home" or Pub 523.

Bill
 
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A

Arthur Kamlet

rick m said:
I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?

2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
Your adjusted cost basis is used to calculate gain or loss.
Those new kitchen cabinets add to your adjusted cost basis.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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H

Herb Smith

rick said:
I've looked around and can't find an answer to this.
Did you look in IRS Pub 523?
We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?
Theoretically, increasing your adjusted cost basis (by
accounting for these improvements) would reduce your taxable
gain. But...only if your gain is over $500,000. Anything
less will be excluded by Sec 121 treatment
2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
You've got the right idea. See Pub 523 for more examples.
 
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L

L K Williams

rick m said:
I've looked around and can't find an answer to this.

We've been in our home since 1992 and plan on selling in the
spring of 2007. Values here have appreciated quite a bit.
Anyway, we were keeping receipts for work done on the house.

The questions:
1) Can we use these receipts to reduce the profit on the
home sale?

2) What does or doesn't qualify for this? I thought that
improvements counted - like if we redid the kitchen and put
in upgraded cabinets it would count but stuff like paint and
light fixtures wouldn't since their purchase was part of a
home repair (you have to paint once in a while, and light
fixtures do go south).
The difference between an improvement (which you can add to
your basis) and a repair (which you cannot deduct) is basic.
An improvement adds to the value of the property or extends
its useful life. A repair only restores value or useful
life which has been impaired.

That said, it isn't always easy to distinguish between
adding value or restoring it. A new floor in the bathroom
can be either, for example; replace a linoleum floor with
new linoleum would be a restoration, a ceramic tile floor,
on the other hand, would be an improvement. The one only
restores the value and life lost by use over time; the
latter not only restores that value but adds new value
because the materials have been upgraded.

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

PaulTry

The difference between an improvement (which you can add to
your basis) and a repair (which you cannot deduct) is basic.
An improvement adds to the value of the property or extends
its useful life. A repair only restores value or useful
life which has been impaired.

That said, it isn't always easy to distinguish between
adding value or restoring it. A new floor in the bathroom
can be either, for example; replace a linoleum floor with
new linoleum would be a restoration, a ceramic tile floor,
on the other hand, would be an improvement. The one only
restores the value and life lost by use over time; the
latter not only restores that value but adds new value
because the materials have been upgraded.
I've been looking for a place to insert this comment and
this seems as good as any:

If you are doing improvements yourself and are buying
materials at Lowe's, Home Depot, or similar building supply
stores, be sure to make photo copies of your store receipts
as soon as possible. The itemized cash register receipts
from many of these stores, printed on thermal paper (or some
similar process), have a tendency to rapidly fade to
illegibility. When you get around to computing your basis,
you likely won't be able to read the original receipts.
Learned this the hard way!
 
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