Primary Home Sale - Is the HELOC Used For Improvements Deductible?

[33Degrees]

An 80 yr old sold her primary home near the end of 2022. She lived in the home for 47 years. She is single and does qualify for the $250K gain exemption. The purchase price in 1976 was $140K.

The home was always too much for her and was in complete disrepair (including the acres of landscape) for years. Two years ago she pulled out a HELOC to try to make repairs. A nephew started repairs which of course the scope continued to grow. Only one sink in the 3200 sq ft home worked, no hvac or heat, foundation in complete failure (lifts of over 2" through the flooring - slab on grade). Three car garage roof was collapsing pushing the walls out so temporary shoring posts and beams were put in place to keep the area safe. This just scratched the surface (not to mention the termite damage).

In the end, they spent all of the $250,000 HELOC making repairs and weren't even close to completing so they decided to sell. The sales contract disclosed the lengthy list of defects from the foundation to the roof and everything in-between. The house was not lendable and a cash investor purchased the property as is.

My Question: Is the $250K HELOC considered an improvement and used to adjust down her taxable gain even though they decided to sell and did not complete all repairs?

The home sold for $1M. For reference, if the house was in move-in condition, it would have sold in the range of $1.8-$2.2M

She had an additional $100K of improvements since purchase over the 47 years (Pools, pool house etc.).

[DMarkM1 · Accepted solution]

Yes, the amount of the HELOC is not a factor.  The amount actually spent on improvements to the home over the years are added to the cost basis which could be more than the HELOC.  According to Publication 523,   "Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.  Further, You can include repair-type work if it is done as part of an extensive remodeling or restoration job. The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home."

[33Degrees]

Thank you, I appreciate your answer.

With respect to documentation of improvements, she lost the paperwork for the pool installation, but remembers the cost from 1981 (considering inflation, the amount she has given me seems in-line or even low in 1981 dollars).

Question: Should we forego adding the pool to the cost basis just because we don't have the actual pool contract/records anymore?

In general, how specific do we need to be with respect to improvements for a home owned for such a long period? Her records are spotty on a couple of items.

Thank you for your time.

[DMarkM1]

The IRS agents are authorized to accept "reasonable estimates" of the cost of improvements.  Include them in the cost basis and keep a record of receipts and estimates with her tax records should it ever come up.