Capital Improvements on sale of primary home

[pc28]

I have questions on what is considered a capital improvement.  Here are some things that I am puzzled about.  Any information is appreciated.

Exterior painting of home

Replacement of pool equipment with more efficient equipment (heater, filter, pump) and replastering the pool.

Upgrading flooring from carpeting to hardwood floors

Replacement of sewer lines under the home.

Installation of green house.

New Carpeting

[JosephS1]

Capital improvements made over the years to a primary home add to the cost basis of the home to calculate the gain or loss on the sale.  Gains on the sale of a primary home are eligible for an exclusion of up to $250,000 for a single or head-of-household owner or $500,000 for a married couple filing a joint return.  The exclusion presupposes that you have lived in your primary home for a least 2 of the preceding 5 years.

If you do not qualify for the exclusion due to the time requirement then any gain would be taxable.  Losses on personal property sold such as your primary residence are not deductible.

Capital improvements that add to the value of your property, prolong its life, or adapt it to new uses would include things like:

• Remodels and room additions (including decks and porches)
• New or upgraded landscaping, irrigation, and sprinkler system
• Hardscape such as pavement, block or retaining wall, patio
• Fencing
• Swimming pool, spa
• Storm windows, doors
• New roof
• Central vacuum or security system
• Upgraded wiring, plumbing, and ductwork
• Central heating, AC, humidifier
• New furnace, water heater
• Filtration, soft-water, or septic system
• Built-in appliances
• New flooring or wall-to-wall carpeting
• Upgraded insulation
• Satellite dish

The FAQ referenced below should also assist you in the information about home improvements

Home Improvements

@pc28 

[rhodion]

These examples are very helpful but there are still some things I do not understand even after reading the IRS rules carefully.

One thing on the original list of questions is exterior paint. I read that a new roof is a capital improvement but new paint is not. These seem like similar things but I guess a roof is like a structural improvement and paint is an expected periodic maintenance item?

What about architectural design and management fees for an improvement like a bathroom remodel? Included in the total cost of the remodel as a capital improvement?

How about repairs made for a structural pest control report? Not just getting rid of the pests, although that may be a benefit, but also repairing the damaged structures and thus bringing the house back to original undamaged condition?

Finally, what about refinishing badly damaged floors? Again, not just periodic maintenance to shine up the floors but repair to badly neglected floors upon move in.

[PattiF]

Yes, a new roof is a capital improvement, but paint, interior and exterior, is always considered repairs and maintenance.

You can include all of the costs including architectural design and management fees for a bathroom remodel as long as fixtures were replaced. This is considered an improvement.

Repairing and replacing the damaged structure from pest damage would be considered as an improvement. See the following from the IRS for more information.

The IRS will promote a repair to a capital improvement in three ways, each of which must provide “a permanent improvement on the value or the life of the property,” Wasserman says.

These include:

• A betterment, such as adding on a room or curing a defect: In one example from the IRS, if you live in an area prone to earthquakes and install expansion bolts to anchor a building frame to its foundation, that’s a betterment. It provides structural support.
• A restoration: such as any costs to restore a property to its original state after a loss or damages, such as a fire.
• An adaptation i.e., any cost of converting a property to a different use: If you remodel a residence to use it as a rental, that’s an adaptation. Likewise, if you install a wheelchair ramp or wider doorways — or renovate the bathroom to accommodate a disability — those are adaptations and capital improvements.

And refinishing floors is also a capital improvement.

@rhodion 

[rhodion]

Thanks, Patti! Those are clear answers and they will help me save some money on what looks to be a gigantic tax bill this year. 

One more grey area: landscaping a yard is a capital improvement as I understand the rules. What happens if you landscape again many years later to make it even nicer? Are they both capital improvements? 

How about having a tree specialist work on your fruit trees to help them make more fruit. I see that could be maintenance but really trying to make the trees better. Is that a possible interpretation?

[pk]

@rhodion  while agreeing with the excellent replies by @PattiF  and @JosephS1 , a  rule that is often used is  if the  improvement/asset lasts more than a year  and /or costs more than $1000, then it should be looked into whether it can be classed as an asset with a life.   Fertilizing / trimming  etc of a tree to help it survive/ do better  may cost a bunch but lasts only for the season  and (  unless you are in a farming business ), does not increase the valuation of the underlying / attached asset -- the house .  However, in the same situation i.e. whole bunch of fruit trees  being serviced  / maintained  and thus increasing the value of the farm may have a different outcome -- depends  on exact  facts and circumstances.

On a new coat of paint --- done say a two years before the sale of the house does not increase the value of the house appreciably and would be either a personal expense, but if it is done precisely because of trying to sell the property this would be sales preparation expense and deductible  from the gains.

Does this clear up or confuse more ?

[rhodion]

pk - You are helping for sure, not confusing. The IRS has tried to precisely define the rules but clearly there is a lot of art involved and sometimes intent seems to matter which is unfortunately all in my head. For example, the tree pruning was done as part of a general yard cleanup and improvement including some new irrigation components. It was intended as part of our preparation to sell which was a year-long project. I think that seeing lots of apples and pears on the trees was a selling point.

Here is yet another tricky situation: There is a middle period of about 10 years, after the days when paper checks were returned by mail (i still have some) from the bank and before the bank stopped keeping check images online about 7 years ago. I wish I had known that they were not keeping the images forever! I know that many improvements were done in those missing years but I can not prove it except that the final result was observed by many friends. Is it possible that the IRS would accept some kind of reasonable estimate for a deck or or new windows etc without actual receipts?

[pk]

@rhodion sorry for the delay in my response.

Generally, if you use your "best efforts"  to validate a claim then you should be alright --- reasonableness.  An expense that is reasonable  for the time  but lacks  full documentary/ contemporaneous  proof, does not mean it cannot be claimed or  will be disallowed. You just have to show that  it is reasonable , was necessary and that you made an honest best effort to substantiate the claim --  but  you do have to show how you came to that estimated cost.   So I would claim the work done and show how I computed the  cost --- always keep documentation as to how you did the estimation ( in case you get challenged.

Also note that unless IRS challenges a claim  it doe not mean it is correct nor that it is wrong -- it is just accepted by both the taxpayer and tax collector ( and without further opinion/comment ).

Does this make sense to you ?

Hope this helps

pk