Cost Basis of a Home, Real Estate and Taxes, Discussed
Sunday, February 19 2006 @ 04:06 pm UTC
Contributed by: jron
On a recent post on a webpage column on tracking the cost basis of stocks and funds, one reader Stuart B. can't help but post what he thinks of it. Blow is the post made by the reader:
"With an Excel spreadsheet and a little diligence, keeping track of the cost basis of stocks and mutual funds is not that hard. More difficult is tracking the cost basis of one's house. It is difficult sometimes to decide what is a capital improvement and what is maintenance. For example, we just replaced some double-hung windows in the living room. The old ones were 50 years old, not very tight, and without double-pane glass. The new ones are Marvin Tilt Pacs with all the latest technology. Thus the new windows are an improvement over the old, but might be regarded, at least in part, as age-related maintenance. Similar arguments can be made for landscaping. Perhaps you could do a column on this."
The columnist answer with this:
Your adjusted cost basis is subtracted from your sales proceeds to determine your capital gain or loss, when you sell a stock, house or other asset.
But many things can increase or decrease it. For example, capital improvements can be added to basis, but repairs or maintenance cannot, because basis starts with what you pay for an asset.
"If you sold a house before May 7, 1997, and deferred the capital gain, that gain reduces the cost basis in your existing house." he said
Adding that "Single homeowners can exclude $250,000 in capital gains on the sale of a primary residence, and married couples filing jointly can exclude up to $500,000, if they have owned and lived in the house for at least two of the previous five years ending on the date of sale."
In addition, "Any profit over those limits is taxed at the capital gains rate, which tops out at 15 percent." concluding with
"The more things you can add to basis, the smaller your tax."
You can add to basis the cost of "additions and other improvements that have a useful life of more than one year." Improvements are things that "add to the value of your home, prolong its useful life, or adapt it to new uses." According to Internal Revenue Service Publication 523.
Putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway.'' Adding a deck, sunroom or new garage are also improvements.
examples including "putting a recreation room or another bathroom in your unfinished basement.
The IRS says, "maintain your home in good condition but do not add to its value or prolong its life," Examples including repainting, fixing gutters or floors, repairing leaks or plastering and replacing broken window panes. However, repairs that are done as part of an extensive remodeling can be added to basis.
"I can't give a specific yes or no answer because the law is not that specific." It depends on "all the facts and circumstances." IRS spokesman Jesse Weller said.
"If all the windows in a home (as opposed to one or two) were upgraded and replaced from 50-year-old single paned windows to new double-paned windows costing $30,000, the IRS would probably consider that expense a capital improvement rather than a repair." sighting it as an example.
"If the new windows were done in 2006, and qualified for the new energy tax credit (up to $200 total for windows), the credit amount claimed on the return would be subtracted from the costs that get added to basis." He adds.
These deductions also reduce your capital gain, when you sell a home, you can deduct from your sales proceeds commissions, advertising and legal fees and loan charges paid by the seller, such as loan placement fees or points.
Gray said "Expenses to fix up a home for sale, such as a fresh coast of paint, cannot be deducted from the sales proceeds, nor can they be added to basis,"
Gray also adds "the rental owner does not have to wait until selling to benefit from the expense. The basis of rental improvements is capitalized and deducted through depreciation, usually over 27 1/2 years. Rental repairs are usually fully deductible in the year of the expense, while personal residence repairs are not deductible,"