Tax Question: Sold our house for a profit but made several home improvements prior.?

Question

We lived in our house for about 1.5 years and then sold it to move closer to family. During the time we lived there, we spent about $3,000 on home improvments (irrigation system, landscape, new paint, etc...). Even though we sold the house for a small profit, we had expenses that increased the value of the home. I know we have to pay taxes on the profit since we lived there for less than 2 years but how can I deduct the home improvements to help even the playing field? -- Thanks!

Answer 1

First, since lived there only 1.5 years, you do NOT get the $250K/per person tax-free capital gains. But you already knew that.

If you spent $3000 on actual improvements (not maintenance), then you can add this to your cost basis. The irrigation system is clearly in this category. The landscaping, likely (although not necessarily all). The painting, no. That's a repair.

On landscaping, it must be something that lasts more than a year. So, if they are plants that need to be replanted each year, you can't count it.

Clearly, the improvement must exist at the time of sale.

See publication 523 and others.

Answer 2

The paint wouldn't count, but the irrigation system and landscaping costs could be added to your basis to reduce the amount of taxable gain. And don't forget any realtor fees you paid either buying or selling. And check both closing statements for anything else that might be able to be added to the basis.

When you show the sale, your basis will be what you bought it for, plus any eligible expenses (see above). The difference between that and your sale price is your gain, and that's what gets taxed.

Answer 3

I don't believe there is any way to deduct those expenses. If you used the property as your primary home, then you would not be entitled to write off expenses, except interest on your loan. If the property was placed in a 1031 exchange and you deferred the taxes from the sale of your prior home, you may be entitled to some additional write offs. Generally speaking, if the property is not a rental unit, no improvement write offs are avaialible. A new one for insulating your home is availible as well as other energy related improvements to your personal home. Having a home office will also provide you with some deductions. Good luck on your new home.

Answer 4

You add the improvements to your cost basis, that is the price you paid for the home. This will reduce the gain on the sale.

Since you owned if for more than 1 year, the gain will be taxed at the long-term capital gains rate of 15% which is probably lower than your marginal rate.