When you buy your home, your purchase price is called your BASIS. When you sell your home at a higher price the IRS can tax you on the profit which they call Capital Gains.
It can also help reduce your gains by keeping good records of home improvements. Home improvements are added to your original basis giving you the Adjusted Basis.
Say you’re single and purchased a home for $300,000 and sold it years later for $500,000. During that time, you made $50,000 of improvements, like a swimming pool, new fences, kitchens and bathroom renovations, etc. The $50,000 is added to your original Basis giving you an Adjusted Basis of $350,000. By keeping good records of home improvements, you just decreased your taxable Capital Gains by $50,000!
There are exemptions:
• When selling your personal residence if you meet the two tests you can exclude up to $250,000 of gain if you are single or $500,000 if you are married.
• There are also caveats to the rule for gifted property, inheritance, or changes to the use of the property from a personal residence to a business.
• Also, if you collected insurance to cover the expenses, those funds will offset your expenditures. So, check with your tax advisor on how these events should be handled. Just remember to keep good records on all your home improvements, so when you go to sell your home, you can offset the IRS share of your profits.