We purchased a home that required work and improvements to live in or sell. Our original intent was to move into it but changed our mind. We did significant improvements. Are these costs all able to be added to the basis?
1- Replace all carpet (60% of flooring)
2 - Refinished hardwood floors (30% of flooring)
3 - Special primer (smoke mitigation) and painting 5 areas (materials only)
4 - Painted several other rooms. (materials only)
5 - Upgraded kitchen (painted cabinets, new counters & sink, new gas range, new microwave, painted walls)
6 - Updated one bathroom (new fixtures, removed wallpaper and painted).
7 - Built a kitchen pantry
9 - Touch-up paint on deck.
10 - Replaced several sprinkler heads.
Things I don't think can be added to the basis.
1 - HOA dues, property taxes and utilities for 7 months we held it.
2 - Tools required for upgrades
I've done a bit of research and am not finding clear answers.
Thank you for your help.
Were the first items, 1 thru 10 done after a fire or something, and the work was required to restore the property to it's former state or improve it after said fire or whatever occurred?
If my assumptions are correct, was there an insurance payout?
Was this home a rental property at any time? If so, when? For example, was it being rented at the time of the fire or whatever?
I'm asking these questions, because some of the items (1-10) may not be property improvements, unless they ware accomplished as "a part of" the rebuild or build out.
No fire or insurance payment.
After purchasing the home we found several rooms had cigarette odors that we had not noticed before the purchase. In those rooms we primed with smoke remediating primer and then repainted. That was also part of the reason for replacing all the carpet.
We never rented or lived in the home. We bought it to move into, but decided not to. Effectively we ended up flipping it.
With all the improvements we did, we sold it for significantly more than we paid for it so I think we can say as a group all the improvements added significantly to the value of the home (beyond the movement of the market over 7 months).
Painting is not an improvement, it is a repair. It is not added to the basis of the property. Carpeting can be.
You would report the Sale of a Second Home in the Investment Section, as other.
You add the cost of capital improvements to your tax basis in the house. Your tax basis is the amount you'll subtract from the sales price to determine the amount of your profit. A capital improvement is something that adds value to your home, prolongs its life, or adapts it to new uses.
There's no laundry list of what qualifies, but you can be sure you'll be able to add the cost of an addition to the house, a swimming pool, a new roof or a new central air-conditioning system. It's not restricted to big-ticket items, though. Adding an extra water heater counts, as does adding storm windows, an intercom, or a home security system. (Certain energy-saving home improvements can also yield tax credits at the time you make them.)
Here are some more capital improvements:
The cost of repairs, on the other hand, is not added to your basis. Fixing a gutter, painting a room, or replacing a window pane are examples of repairs rather than improvements.
Repairs are a deductible expense in the year paid for a rental, but unfortunately, never deductible for your personal home.
@co_guy said "I've done a bit of research and am not finding clear answers".
That's the nature of the great American tax code. You're gonna get opinions here rather than a clear answer.
I'm of the opinion that the 10 items you listed constitute one improvement project and can be added to your cost basis.
Since the home will be sold at a gain, the 2nd question, you didn't ask is academic: did you sell a flip house or a a 2nd home. It would only make a difference if sold at a loss.