Where in TT 2023 Delux enter cost of Home Improvements

[Dmitry]

Hello,
We sold a home in 2023 and now have pretty high Capital Gain amount (calculated by TT 2023).

We did many Home Improvement.  But I can't find where to enter then in TT 2023 Delux.

I would appreciate someone pointing me to where to enter these expenses?

Also, if I enter these expenses, do I need to do an Itemized Deductions (not Standard Deductions)?

Thank you.

[Dmitry]

Odd that nobody found this question reasonable and provided an answer.

[Vanessa A · Accepted solution]

The home improvements that you did, would be added to the cost basis of the home.  They would not be itemized, they would just be added in with the price you paid for your home whenever you bought it.

The improvements that you can add to the cost basis would be things that extend the useful life of your home or change the home in some way, like an addition or a new deck, a full kitchen remodel.  Doing something like painting the walls would not add to the cost basis of your home.  Expenses for standard maintenance or repairs would not be deductible at all for your home expenses. 

To enter the adjusted cost basis, you will go to Sale of Home under Less Common Income, enter the selling price, date sold and selling expenses (realtor fees, etc) and then click next.  Then you will enter the date you bought the property and the adjusted cost basis which will include any major home improvements you did while owning the home. 

Home Improvements and your taxes

[DoninGA]

The cost of any improvements made to the home prior to the sale are to be included in the Adjusted Basis of the home.

[Dmitry]

Hello Vanessa,

Thank you very much for the detailed reply.

I understand your answer but it is strange (at least to me) that IRS won't know how much I paid for the home and how much are the Capital Improvements.   Because I would simply (if I understand your suggestion correctly) enter the date when the home was purchased and the Adjusted (cost basis) amount.  

I suppose someone from IRS will check the number and decide (if necessary in their view) to audit us.
Again, thank you.

[Dmitry]

Thank you, Donin. 

[mgarry3416]

I'm a retired IRS Revenue Agent - funny you should ask.

First off all the IRS will know is the sale of the house from the F1099 you receive from the sale.  Its up to you to keep all you tax records from the purchase of the house to the sale of the house.  

You get to add to the basis any capital improvements to the house such as remodel or even a new roof. 

From the sale of the house you get to deduct any expenses such as commissions and any repairs including repainting to sell the house. 

How does the IRS know what you paid -  It has access to various records that report sales amount and property tax amounts.  So when you remodel your house and get a building permit it shows up on the database the IRS uses.  It also uses the sales of other houses from other taxpayers.  You are not the only or first house ever sold.  The IRS knows from history that people who own and live in a house for 20 years may have remodeled once or twice (kitchen and bathroom) and maybe replaced the roof on a 100 year old house or even a 30 year old house.  If the amount added is within parameters it is usually accepted. 

But remember your return could be selected for any reason and if selected everything on the return is subject to review (audit).  Keep all your tax records (including the purchase and sale ) for 7 years after you report the sale.     

[Dmitry]

Hello,
Thank you for your valuable input. 

Of course, I know how much we received for the house; it only happened 6 months ago.  Even though nobody sent us any form (when I asked the RE agent, she said, "I don't know and we do not do it")
I do not have any records of the purchase of the house.  I know that the attorneys who did the closing must have the records and, if necessary, IRS can reach out to them.   Frankly, I don't even remember how much we spent on the lawyers when purchasing the house (many, many years ago).

I do have some records of the Capital Improvements and I don't have many other records.   As far as the permits, the contractors were supposed to obtain them.  If they did, nobody knows.  I do know that some contractors charge the residents for the permits but pocket the money (such is the business).
The bottom line, I now know how to enter the Capital Improvements cost (simply add the number to the purchased price).  And then see if IRS decides to audit or not.

Again, thank you.

[mgarry3416]

You should have received a closing statement from the escrow company.  Its a HUD form and I don't remember the form number.  You should have received a draft copy when you signed the closing documents with the escrow company and received the final version with the check you from the escrow company.  The Escrow company would also submit to the IRS the information returns (F 1099-somthing or 1098) as part of the closing.  Contact the escrow company.  If your relator agent didn't know this - well its something a real-estate agent should know.    

Remember keep all your records on your house for at least 7 years after the sale.  Also use websites like Zillow to see sales history of your house.   

[Dmitry]

The Form number (according to the TurboTax) is 1099-S.  Nobody sent us this form.  Good thing that TT defaults the question (Did you receive a Form 1099-S?) to No.  Apparently, only a few people receive this form.

But I have the closing statement from the attorney which itemizes the sale price, the agent fees, attorneys fees, etc.  Therefore,  I know all that I need to know about the sales of the home.   And they probably submitted the paperwork to the IRS.  Maybe. 
You wrote:
>> Remember keep all your records on your house for at least 7 years after the sale.  

Now, with computers and scanners it is easy to keep the records.   But what happened 20 years ago is another story.  I know that IRS may say that what I write we spent on the house (capital improvements) is unreasonable and disallow it.

Again, the "reasonable" is all up to the IRS since I do not have many records.

[Dmitry]

Hello,

As a retired IRS Revenue Agent you may know the answer to the following question. 

Say, IRS audits a person and finds that a person does not have the receipts of the house renovations.  Of course, the number a person puts in their tax return is changed and the capital gains are due.  That is clear.  

What other penalties (if any) IRS imposes on the tax return lacking the receipts of the house renovations?

Thank you in advance. 

[mgarry3416]

There are several ways you could support or substantiate the repairs or renovations without a receipt.  You could use the canceled check showing the date, payee, and amount paid.  You could use the bank statement and check book register showing the same details.  If you paid by credit card the credit card statement showing the initial charge would also work. 

You could also use a sales brochure with a price quote or estimate.

If the contractor took out a building permit, you could use that amount .

Loan documents if you took out a loan for the work.

If your property tax base went up because of the work you could use that to estimate the value of the work.  In California the tax base value may only rise 2% per year unless you add value to you property then the State may also increase the tax base by the value of the work.  If you spent $10,000 to repair and replace you roof  then you property tax base goes up 2% of last years value plus $10,000. 

For your deduction whatever you use document how you determined the amount.  if possible make a copy of the record you used.  In government we would call this a "Memorandum for Record" or MFR.  On a sheet of paper you would state the facts and your conclusion.  For my 20023 tax return for the basis of the property at 123 Main Street sold on date 2023, I used the following:

the price paid from Zillow showing the previous purchase price of $100,000 on Date 2003.

We repainted the house using Smith Brothers painting on Date 2010 for $2,000 from our check book register showing check number 1003 dated Date 2010 to Smith Brothers or John Smith,

We remodeled the house on Date 2015 from our check book register for $15,000 from check book register and building permit data from city of XXX .   

The other issue is materiality.  If you spent $200 for paint and supplies to repaint your house 20 years ago; it really doesn't matter about the receipts if your audited.  Your statement should suffice.  Your deduction in that case is $200.  If you spent $20,000 then that amount is material and some records would be expected.  If you spent $200,000 then there should be all types of records showing the payment. 

Please also note that the State also reviews your return and they will also want to review any major property improvement s against their records.   I'm from California.  So if you claim $200,000 from a remodel 10 or 15 years ago and the amount was not added to the taxable property  the State of CA would also come after you for additional back property taxes.  Sometimes it may be best not to report or deduct such improvements.

If all else fails hand the agent a floppy disk and say the 1995 records are all here.  - ok bad tax joke

[mgarry3416]

Getting to your question the penalty is  20% of the additional tax due plus interest.  

[Dmitry]

Thank you.

[Dmitry]

Thank you for your detailed input.
I am not in California.  The problem is (and I know that Ignorance is not an Excuse), I was under impression that you don't have to pay tax on the sale of a primary home (once in a life time).  So, I was not saving the receipts.

The CPA (a friend) told me that the law has changed about 30 years ago and now you have to pay tax based on the revenue from the sale of the house.   I do have receipts for the past 10 year but nothing for the prior years.

We lived in the house almost 30 year and I remember having some major renovations 20 years ago.  But no records.   So, I will have to estimate.

Again, thank you.