It’s tax season — and here are some tips for harvesting the best fruit with the help of these deductible home improvements.
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The personal stories of one Realtor’s battles and triumphs in the highly-competitive Bay Area Real Estate Market, seeking to illuminate and humanize the very real ups-and-downs of homeownership.
From pensive to crabby
I’m at my wit’s end as Cliff and I pull together our taxes at the request of our beleaguered and very patient CPA.
“We really need your figures this week,” his assistant said, “or we won’t make the October deadline.”
Fair enough. For a woman who HATES procrastinating, dealing with Federal and State income taxes is my least favorite chore of the year, and one I will happily put off until the very last minute. (It’s the last minute!) “While I’ve got you on the phone,” I said, “we’ve just sold our property on Echo, so tell me what exactly I get to write off for NEXT year’s taxes?”
Given that Echo was an investment property and NOT our primary residence, Cliff and I can’t claim the $500,000 tax-free capital gains ($250,000 individually) that residential Homeowners are afforded when they sell their personal properties.
However, we can still capture most of the improvements we made on the property and ALL the selling costs. Even so, we’ll be paying a hefty chunk of change to Uncle Sam just the same, and yes, that makes me incredibly crabby. The only way around the tax obligation would be to 1031 Exchange the property for a “like-kind” commercial investment, and having just paid the tenant a whopping settlement to vacate, we’d rather not.
But if you’re wondering, here ARE some of the costs of selling that Sellers CAN legally deduct from their capital gains according to NOLO (a legal website for low-cost legal information):
- staging
- appraisal fees
- closing fees
- document preparation fees
- escrow fees
- mortgage satisfaction fees
- notary fees
- points paid by the Seller to obtain financing for the Buyer
- real estate broker’s commission
- recording fees (if paid by the Seller)
- costs of removing title clouds
- settlement fees
- title search fees
- transfer fees: city, county, or state governments.
Additionally, if you have made substantial physical improvements to your home – even if you did so years before you started actively preparing your home for sale – you can also add those costs to your tax basis which will positively reduce the amount of taxable profit from the sale.
For tax purposes, a home improvement is any expense that “materially adds” to the value of your home, significantly prolongs its useful life, or adapts it to new uses. Standard upkeep such as: mowing the lawn, cleaning the carpets or painting the hallway are NOT considered material improvements unless they are part of a major remodel.
Here’s a list of legitimate deductible home improvements that DO count:
- adding a new bedroom, bathroom, or garage
- installing new insulation, pipes, or duct work
- replacing walls and floors
- installing a new or upgraded heating and air conditioning systems
- installing new landscaping
- installing new fences, retaining walls, porches, patios, or decks
- replacing driveways and walkways
- installing a new roof, windows, or doors
- installing new wall-to-wall carpeting
- installing new built-in appliances
- refinishing the hardwood floors
- hanging wallpaper
- any major repairs to restore your home after a disaster such as a fallen tree or fire.
In other words, you’re going to want to comb through your receipts . . . .
The smartest and most tech-savvy homeowners keep an Excel sheet on hand and can easily pull these figures together once they sell, but the majority of us (me included) have a property file of receipts, bids, and paid invoices that go back a decade or two, and then we’ve got to sit down and separate the deductible expenses (renovating the kitchen) from the non-deductible expenses (buying lightbulbs from Home Depot) before we can add up the allowable deductions and reduce our tax basis.
So pull out the calculator and get to work. You’ve probably invested more than you realize, and I promise, it will be well worth your time and trouble.
And with that, no more procrastinating, it’s time to get back to my taxes. (Ugh.)
How can we help you?
Julie Gardner & Sarah Abel | Compass Realty
Not just Realtors, but consultants in all things house and home, we’re here to educate, explore, examine and refer . . . In short, you may count on us to take care of your home as if it were our own and anyone who knows us, knows we take pretty darn good care of our homes.
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