Article Highlights:
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 a record of improvements made to the home. 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.
Here are some situations when having home improvement records could save taxes:
Everyone hates to keep records but 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), and there is a good chance the CG tax rate will be higher than normal 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 in excess of the exclusion amount.
As to what 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 canceled 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.
If you have any questions, contact us at James@AcePlusTaxResolution.com or visit our website at https://AcePlusTaxResolution.com/.
