Tax Tip of the Week
For the week of April 19, 2004

Track your remodeling costs

If you sold your home tomorrow, would you have to pay capital gains tax? The answer could depend on where you live and how long you've owned your house.

Generally, you're allowed to exclude the first $250,000 ($500,000 for married couples) of capital gains when you sell your principal residence. For many homeowners, that's enough to avoid any tax. But if you bought your home many years ago, or you live in an area where prices have been rising fast, your gain might exceed the exclusion amount.

However, there's one way to help reduce your capital gain. In general, the gain is the difference between your selling price and your original cost. But you're allowed to add to your original cost for any improvements you've made to the home.

An improvement is defined as something that extends the life of the home or adds to its value. Examples include replacing the roof, adding an extension to the house, or landscaping the yard. Amounts you spend for repairs, which merely keep the home in good working order, can't be added to your original cost. Sometimes there's a fine line between improvements and repairs. For example, replacing a few missing shingles might be a repair, while replacing the whole roof is an improvement.

Because improvements can reduce your capital gain, it pays to keep good records of what you spend. Save bills, receipts, and cancelled checks, and note what they were for. You'll need to keep these records until you sell your home. If in doubt whether an expenditure is an improvement or a repair, err on the side of keeping good records. For more information or assistance, give us a call.

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