Does the End Justify the Means?
When purchasing a new home few items are deductible in the year you buy your
home if you itemize your deductions. Most tax benefits from items listed on
your settlement sheet are not derived until you sell your home. You must be
cognizant of all capital improvements made to your home that add value to
the basis of your residence.
At that time you sell your residence, deductible fixing-up expenses do
not include amounts paid for capital improvements. Fixing-up expenses would
include: the cost of painting the home, planting flowers, replacing broken
windows, etc. These expenses are usually not deductible expenses from your
home basis cost; however, if the "fix-up" work that is done during the
90-day period ending on the day you signed the contract to sell your home,
and paid no later than 30 days after the date of the sale, could qualify and
should at least be presented to your accountant for a determination.
Gains realized from the sale of a personal residence can create a taxable
event. As long as the inflationary market is on the rise, it is important
for you to supply your accounting firm with the information so that they can
construct the basis of your original house cost. Then on a yearly timetable,
present all improvement receipts made to your home in order for your
accountant to create a yearly roll-forward of allowable expenses.
Remember repairs and maintenance that do not extend the life of your home
are not considered part of the basis.
Items that increase or decrease the basis of your residential property
and will affect your potential capital gain include such things as:
| Increases
to Basis: Contract Sales Price, Credit for Energy Saving
Devices, Hold backs for Improvements, Casualty Loss
Deductions, Closing and Commissions Costs Paid, Insurance
Reimbursements, Zone Costs, Postponed Gain from Prior Home,
Flooring Decreases to Basis: Section 179 Deduction, Landscaping, Depreciation, Heating & Air Conditioning, Rewiring or Plumbing Upgrades, Roof Replacement, Additions, Assessments for Local Improvements, Restoring Damaged Property |
If you contracted to have your home built, your original basis will be
the cost of your land plus the amount you paid to have the home built. These
costs include labor, materials, contractor costs, architect's fees, building
permit charges, utility meter and connection charges, and any legal fees
that are directly connected with building your home.
Maintaining a perpetual roll-forward of the cost basis of your homes
could avoid future capital gains at the time of the sale.
When deciding if the end justifies the means, you must consider the
potential gain that would be realized through improvements and inflation,
and decide if keeping control of residential basis justifies the savings you
may realize at the time of the sale. We believe it does, and we recommend
bringing this information to us in conjunction with your annual tax
preparation. An ounce of prevention can beat a pound of taxes!
~Mary R. Mashaw, CPA
Warfield & Company, CPA's