Individuals who meet the two-out-of-five-year use and ownership tests can exclude up to $250,000 ($500,000 if both filer and spouse qualify) of gain from the sale of their home, and generally don’t need to keep a record of improvements made to the home. However, in many instances the gain from the home’s sale can be substantially higher than the allowable exclusion amount; having a record of improvements can be very beneficial and lead to tax savings.
Here are some situations when having home improvement records could save taxes:
- The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount.
- The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property.
- The home is converted to a second residence, and the exclusion might not apply to the sale.
- You suffer a casualty loss and retain the home after making repairs.
- The home is sold before meeting the two-year use and ownership requirements.
- The home only qualifies for a reduced exclusion because the home is sold before meeting the two-year use and ownership requirements.
- One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples.
- There are future tax law changes that could affect the exclusion amounts.
Everyone hates to keep records but consider the consequences if you sell your home at a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain in excess of the exclusion amount.
As to what records to keep, we aren’t saying you need to keep the receipt for every time you buy a can of paint or replace a ripped screen (these wouldn’t be eligible as improvements). But you should maintain receipts, invoices, contracts, etc., and cancelled checks, credit card receipts or bank records to prove payments when you make improvements such as adding a room, putting on a new roof, and remodeling the bathroom.
If you have questions related to the home gain exclusion or questions about how keeping home improvement records might directly affect you, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166