The house was originally gifted to us in 2004. We made improvements to the home and sold it in 2016. It was a second home for us, not primary.
If you used your second home for personal use, IRS does not allow any deductions on the improvements. You can only add those improvement expenses to the cost basis of your property when you sell it. However, if you used it for business use, for example rental, then you can deduct the capital items by depreciating them over a period of time instead of all at once.
For personal-used home, by adding the amounts you spent on the upgrades to the original purchase price would increase your basis of the property, therefore lower the taxes by reducing the gain. If you sell the property for a loss, your cost basis is the lesser of (1) the Fair Market Value or (2) the Basis (usually the purchase price plus cost of improvements). However, the basis for a GAIN is the actual Basis. The Fair Market Value is not used if it is sold at a Gain.
For business-used or rental property, see information below:
If you used your second home for personal use, IRS does not allow any deductions on the improvements. You can only add those improvement expenses to the cost basis of your property when you sell it. However, if you used it for business use, for example rental, then you can deduct the capital items by depreciating them over a period of time instead of all at once.
For personal-used home, by adding the amounts you spent on the upgrades to the original purchase price would increase your basis of the property, therefore lower the taxes by reducing the gain. If you sell the property for a loss, your cost basis is the lesser of (1) the Fair Market Value or (2) the Basis (usually the purchase price plus cost of improvements). However, the basis for a GAIN is the actual Basis. The Fair Market Value is not used if it is sold at a Gain.
For business-used or rental property, see information below:
another thought is if you held the property for investment purposes, did not use it personally other than when working there, planned on improving it souly to sell it when markets appreciated, it would be sale of an investment property and your costs would be added to basis received and a loss could possibly be taken depending on how you treated it over the years, speak to a tax advisor