Cost Basis Items on Newly Constructed Personal Residence

[hardrightedge]

After reviewing the IRS's thin guidance and numerous web sites some questions remain.  Examples state that replacement of certain items such as free standing appliances and window treatments are not to be considered capital expenses.  How about new construction?

After purchase of the newly constructed home, with no appliances or window treatments provided by the builder, the owner then purchases originals.  Guidance indicates that built in appliances are capital costs (even eventual replacements) to be included in cost basis, but what about that first free standing washing machine?  In the case of the original window treatments they are attached, "built in" in effect, no less than an original light fixture.  These items have an expected life span of more than a year and add to the value of a home upon sale provided they are included in the sale.

[Mike9241]

but what about that first free standing washing machine?  In the case of the original window treatments they are attached, "built in" in effect, no less than an original light fixture.  These are items have an expected life span of more than a year and add to the value of a home upon sale provided they are included in the sale. 

assuming you don't remove them on sale, I would include them in the cost since had the builder included them the price would have been higher.   

[NCperson]

suggest reading the definition of a 'capital improvement' on page 8

https://www.irs.gov/pub/irs-pdf/p523.pdf

"Improvements add to the value of your home, prolong its useful life, or adapt it to new uses".

Please review the chart on page 9: it provides examples of capital improvements. 

Note that 'built in'  appliance are considered capital improvements (think oven or dishwasher) But in most cases, I think you are going to be hardpressed to state that a washer/ dryer or refridgerator are 'built in'. especially if your builder was able to get a certificate of occupancy WITHOUT these items in place.  

Window treatments: curtains, etc??  they are not permanent fixtures to the home; the next homeowner may not like your curtains, blinds, etc and simply remove them.   How do they meet the IRS definition of a 'capital improvement'?  The house is livable without window treatments, so they can't be an improvement that prolongs useful life of the home.  

Personally, neither the washer or the window treatments qualify as capital improvements. They are not on the example list nor do they extend the usefil life of the home.  

[hardrightedge]

That would be my presumption but I was looking for more concrete verification.  Some new builds come with some or all free standing appliances, particularly condos, where the cost is included in the sales price.  It would be inequitable to allow that to be included in the cost basis but not in my example.

While the IRS wants to keep us on double-secret probation or keep the accounting-industrial complex fully employed, New York State provides a lot of detailed guidance which seems to conform with the IRS vague guidelines:

https://www.tax.ny.gov/pdf/publications/sales/pub862.pdf

If page 19 of that link is to be taken literally, it suggests that a free standing washing machine would not be a capital expense under any circumstance , though the cost of the original items in a new build is not specifically addressed.

As for window treatments, common sense would suggest they are on par with carpeting, both capital expenses in a new build.  However, depending on what you read, if you replace the entire carpet in a room that is a capital expense while replacement of curtains in that room, and not even the rods that are attached to the wall, are not.  

[hardrightedge]

I've read those references.  Put succinctly, and referencing back to my previous post, the original carpet in a new build (and a later replacement for that matter) can be treated as a capital expense.  It is unclear how this would be different from window treatments.  Given the choice, some would prefer walking around on a subfloor while have window coverings vs. having carpets but no privacy.  There is no reason to prioritize one over the other.  

As far as replacing carpeting (or anything else that can be treated as a capital expense), I find one web site saying if you replace carpet in an entire room the cost of the new can be included in the cost basis, but the cost of the previous carpet you installed is then to be eliminated from the basis.  I find that to be intuitively  sound thinking though not necessarily accurate because I'm not finding any IRS guidance in this regard.  Taken literally, what the IRS seems to say in their sketchy guidance is that you can include both the old and new in cost basis even if you paid for both of them which is counterintuitive.

Lets say I buy a new build and pay a contractor $5,000 to put in a driveway.  Twenty years later it is replaced at a cost of $8,000.  If you take the IRS sketchy guidance literally my driveway cost basis is $13,000.  Again, this is counterintuitive.

Referencing back to the New York State guidance, even something as simple as planting a shub and then replace that shrub, seems to allow for counting both shrubs in the cost basis.

The crux of that matter, independent of the particular item, is who bought the original capital expense item that is now being replaced, new build or otherwise.  It seems the guidance is directed toward buying an existing home where everything is used and in various states of depreciation and that is reflected in the price as anyone would know who has priced new builds vs. existing.  As far as this matter is concerned, does the IRS (or New York State for that matter) in fact differentiate between buying and replacing somebody else's depreciated item vs. replacing something you bought new, or do they just unintuitively not  care?   

[NCperson]

<<Lets say I buy a new build and pay a contractor $5,000 to put in a driveway.  Twenty years later it is replaced at a cost of $8,000.  If you take the IRS sketchy guidance guidance literally my driveway cost basis is $13,000. >>

For your example, when you sell, the $8000 is what is part of the cost basis; the $5000  is no longer part of the equation.  That 1st driveway is obsolete and does not meet the requirment of extending the life or adding value to the house (yes, it got you to this point in time, but not into the future).   Same would apply to multiple roofs, heating systems,etc. over the life of ownership.

This discussion is about personal home ownership.  If the building was an investment property, difference rules apply. 

Go back to the definition of 'improvement'.  

[hardrightedge]

The definition of "improvement" is of no help, but from a word search on "improvement" I see now, on page 9 of IRS Pub 523, there is the example of a cost that cannot be regarded as an addition to cost basis:

"Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced)."

So, yes, you are correct with regard to driveways (or any other capital expense) and this conforms with what I regarded as intuitive.  Thanks for getting me to take a second look.

Problems remain.  If the home was a new build and the driveway was included in the contract with the builder you are not likely to find the cost of the driveway (or any building system for that matter) itemized.  In my experience with three new builds the only itemizations were for allowances for certain finishes and fixtures.  If you later replaced the driveway or roof or any number of things, you would have no way of knowing the cost basis you are replacing.

Back to the question of new build free standing appliances and window treatments.... 

[NCperson]

suggestion: the whole issue of 'cost basis' is moot unless

1) you sell the property within two years of the purchase OR

2)  you live in the property for at least two of the last 5 years of ownership and the gain on sale is more than $500,000 (joint) / $250,000 (single)... 

if there is a loss on sale of the home in the future or you live in the home when you die.....it's not going to matter - there are no tax implications.

might be worth deciding on window treatments you can look at each day vs. whether they add to your cost basis 😊

[hardrightedge]

Yes, 2 of the last 5 years--second homes don't qualify for the exemption.  And there are cities where ordinary homes bought just a few years ago have have over $250,000 or $500,000 in appreciation.  Every $ one can account for counts.  Window treatments for an entire house can run into the several thousand dollars even if you buy discount blinds on-line and install them yourself.

hether you buy curtains, a washing machine, or anything else that you can live with or not the question remains as to cost basis treatment.