Why Saving Receipts for Home Improvements Can Save You Money on Taxes
When you make any major improvements to your home for example, adding a new deck, remodeling the kitchen, or installing energy-efficient windows, it’s easy to get caught up in the excitement of the new features and forget about the paperwork. However, it’s advisable to save those receipts as these home improvements can be a smart financial move that pays off in the long run. Surprisingly many homeowners never realizes how much this one simple act can save them money, or they’ve heard about it when its too late. Here’s why keeping those receipts can help you reduce capital gains taxes when you sell your home.
Understanding Home Basis And How It Can Lower Your Tax Bill
First, let’s talk about what “basis” means. Your home’s basis is the cost of what you paid for the property, including the purchase price and certain other costs like realtor fees. When you sell your home, the basis is used to determine how much profit (or capital gain) you’ve made. For example, if you bought your house for $200,000 and sold it for $300,000, your profit would be $100,000.
Home Improvement Deductions From Capital Gain When Selling Your Home
Certain home improvements add value to your home and can increase your basis. This is where saving receipts becomes important. By keeping track of the money you spend on substantial improvements, you can add these costs to your basis. This means that when you sell your home, the profit you report for tax purposes might be lower, potentially reducing the amount of capital gains tax you owe.
Let’s say you spent $50,000 on home improvements. Using the previous example, if your basis was initially $200,000, you can increase it to $250,000 by adding the $50,000 in improvements. If you sell the house for $300,000, your taxable profit is now $50,000 instead of $100,000, significantly reducing your tax burden.
What Qualifies as a Home Improvement?
Not all expenses qualify as home improvements. Maintenance costs, such as painting or fixing leaks, don’t count because they don’t add to the value or extend the life of your home. Qualifying improvements include:
- Adding a room or deck
- Remodeling the kitchen or bathroom
- Installing a new roof, HVAC system, or water heater
- Upgrading to energy-efficient windows or solar panels
Essentially, any project that enhances your home’s value, prolongs its useful life, or adapts it to new uses can typically be added to your basis.
The Importance of Good Record-Keeping
To take advantage of the tax benefits, you need to keep thorough records. This means saving receipts, invoices, and any contracts related to the home improvements. It’s might also be helpful to take before-and-after photos of the projects to document the changes. Organize these documents in a safe place, such as a dedicated file or a digital storage system, so you can easily access them when needed. Paper receipts can fade with time, so a digital storage will last as long as they don’t get deleted.
After you sell your house be sure to communicate with your tax preparer that you had some improvements that you would like to use to add to your basis.
The Long-Term Benefits
Saving receipts for home improvements isn’t just about saving on taxes when you sell your home. It also helps you keep track of your investment in the property, which can be useful for insurance purposes and for making informed decisions about future home projects.
Additionally, good record-keeping can be beneficial if you face an audit by the IRS. Having detailed documentation will support your claims and make the process smoother.
Conclusion
While it might seem tedious to save every receipt and document every improvement, doing so can lead to significant tax savings down the road. By increasing your home’s basis through documented improvements, you can reduce your taxable profit when you sell your home, potentially saving thousands of dollars in capital gains tax. So next time you start on a home improvement project, remember that a little bit of organization today can lead to substantial savings in the future.
