What improvements increase the basis of a primary residence?

Question

Unfortunately this is an academic exercise because I'll never make $250,000 profit on a home, but I'd like some clarification on which of these improvements will increase the cost basis of a primary residence:

1. Upgrade of existing item, such as replacing a Formica countertop with marble. IRS would probably say that's maintenance/replacement, but by normal accounting that's a capital improvement.

2. Replace item that was defective when house was purchased. For example, if the roof leaks when you buy it and it's not reasonable to repair it, it would be fair that getting your house to functional condition would be part of your cost of acquiring a primary residence. Obviously it would be cleaner if you could get the original owner to replace the roof and pass on the cost in the purchase price, but that's not always practical.

3. Repair defects in a newly-purchased house. Again it would be fair that repairing a leaky roof would be part of the acquisition cost.

Answer 1

This is a question for which volumes have been written. In each case you need to make a case that the project is "improvement" not "maintenance". In your counter-top example you should take the difference between the Formica and marble counter-tops an add that to the basis as an improvement. Roofs get special treatment, they always count as improvement. If you fix an existing faucet that is maintenance, if you replace it with a like faucet that is maintenance, however if you replace the leaky faucet with one of greater value you can add to the basis the difference between the like kind faucet and the new improved faucet. I have only had one audit on this issue and I got the client $253 more refund than the original return's calculation for capital gain.

Answer 2

If it increases the value, it is an improvement.

If it doesn't, then its maintenance.

1. Replacing Formica counter top with marble would probably be an improvement
2. New roof would be an improvement. Note that if you replaced the roof twice, you would have to subtract the cost of the first replacement before adding the second replacement.