I am remodeling my home and also adding an in-law quarter that I may rent in the future. What records do I have to maintain and when do I use them to do taxes correctly?

[Rainman12]

1) If getting a loan for construction, interest may be deductible. Should be reported on Form 1098.

2) If you itemize, sales tax paid on building materials may be deductible. Itemized bill required.

3) When/if you rent out, proportionate cost of rented area must be documented and depreciated.

[Hal_Al]

You need to keep track of your total cost basis (what you paid for the house, plus the cost of improvements, like the remodel).  Do not include repair cost, in the cost basis. 

When the time comes, to rent it out, you will prorate your cost based on the size of the rented area, e.g. if the total house  is 1000 Sq. ft and the in-law unit, 300 sq. ft.,  you will depreciate 30 % of the cost basis.  You will not include land value in the depreciable amount

[tax-novice2]

To track cost basis, what costs do I add to what I paid for the house? I am currently paying for city-design review fees, architect fees, Permit-fees, inspection-fees, actual construction cost etc. What all gets added to the cost basis?

[Hal_Al]

All of those ( city-design review fees, architect fees, Permit-fees, inspection-fees, actual construction cost) are part of the project cost and are added to your cost basis)

[tax-novice2]

Thanks Hal. Do I register these costs with any entity e.g. IRS or county right after re-modeling, or do I just collect and store the receipts ? Sounds like I will have to store them for a very long time (till I sell or rent the home?). Is that correct? Just double checking since it sounds like I have to be very careful about storing the receipts since it may be 10, 20 .. 30 yrs or longer before I sell/rent the home.

[VolvoGirl]

Yes only keep the receipts.  Thats all.  Just keep track of the cost and improvements.  You could use a program like Quicken especially if you are going to rent it out.  Then you will have Rental Income & Expenses to keep track of too.

[tax-novice2]

Do school fees paid as a condition to get the permit also count as expense and that can be added to compute the basis for the home?

[Hal_Al]

Yes,  school fees,  paid as a condition to get the permit, also count as  an expense that can be added to you cost basis.  This would not be true, if the fees were otherwise in arrears, and the permit condition was just a way to get you to settle up.

"School fees" are typically just an itemized part of the permit cost that goes to fund school construction.  The assumption being that additional residential square footage means additional kids in the school system.

[tax-novice2]

During re-modeling, I am mostly paying my general contractor by check, but sometimes I pay the sub-contractors directly. Some of them have demanded cash. If I get invoices for the cash payments and store them is that sufficient? Is there any downside to paying in cash or any extra accounting procedures that I need to follow?