Maximizing Tax Savings: How to Increase Your Home’s Basis

When it comes time to sell your primary residence, one of the most important factors to consider is the basis of your home. The basis essentially represents what you’ve invested in the property, and it plays a crucial role in determining the taxable gain when you sell. By increasing the basis of your home before selling, you can reduce your capital gains tax liability and potentially save thousands of dollars.

In this post, we’ll dive into what counts toward increasing the basis of your home, what doesn’t, and how you can take advantage of these strategies before putting your home on the market. Recall that under current law a married couple has a $500,000 exclusion on capital gains for selling a primary residence.

What is Basis and Why Does It Matter?

The “basis” of your home is essentially the original purchase price of the property, plus the cost of any improvements or updates you’ve made over the years. When you sell the property, your taxable gain is calculated by subtracting your basis from the selling price. The higher the basis, the lower the taxable gain, which translates to less tax liability.

The good news is that there are several ways to increase the basis of your primary residence. However, it’s important to know exactly what counts and what doesn’t when it comes to increasing the value of your investment for tax purposes.

What Can You Do to Increase Your Basis?

1. Home Improvements Home improvements are one of the most effective ways to increase your basis. These are upgrades or changes that enhance the value, usefulness, or longevity of the property. Some examples of home improvements include:
   • Adding a new roof
   • Building an addition (such as an extra room or garage)
   • Installing energy-efficient windows or doors
   • Renovating a kitchen or bathroom
   • Replacing the plumbing or electrical systems
   • Installing a new HVAC system
     
     These types of improvements can significantly increase your basis, and as a result, lower the amount of taxable gain when you sell.
     
2. Landscaping and Outdoor Enhancements Landscaping that is permanent and adds value to your home may also count towards increasing your basis. This includes:
   • Installing a new deck or patio
   • Building a fence
   • Adding a swimming pool or hot tub
   • Planting trees or shrubs that improve curb appeal
   • Paving your driveway or walkways
     
     These enhancements make your property more attractive and may increase its market value, which in turn raises your basis.
     
3. Major Repairs Major repairs that restore the home to its original condition or extend its life also count. For example:
   • Replacing an old furnace or air conditioning unit
   • Replacing or repairing the roof if it has significant wear and tear
   • Foundation repairs that address structural issues
   • Replacing old plumbing or electrical systems to meet code
     
     However, general maintenance like cleaning gutters or fixing small leaks won’t add to your basis, so make sure the repair is substantial.
     
4. Costs Related to Buying or Selling the Property Certain costs involved in the purchase or sale of your property can also increase your basis. These include:
   • Closing costs such as title insurance, recording fees, and legal fees related to the purchase
   • Real estate agent commissions (in some cases)
   • Transfer taxes when buying the home
   • Certain costs incurred for improvements made just before selling, such as fixing the home for staging purposes
     
     Keep detailed records of these expenses to ensure they are included in your basis.

What Doesn’t Count Toward Increasing Your Basis?

It’s equally important to know what does not count toward increasing your basis. The IRS is clear on what qualifies, and many common home expenses do not fall into this category. Some examples include:

1. Routine Maintenance and Repairs
   • Painting or wallpapering
   • Fixing a broken appliance or a leaky faucet
   • Mowing the lawn or cleaning the gutters
   • Basic cosmetic changes, such as replacing countertops or flooring, unless they significantly improve the home’s value
     
     While these expenses can improve the livability or aesthetic appeal of your home, they do not increase your basis for tax purposes.
     
2. Homeowner’s Insurance and Mortgage Payments: Payments for homeowner’s insurance or mortgage payments do not count toward increasing your basis. These are considered operating costs and not improvements or additions to the property itself.
3. Personal Property: If you buy furniture, appliances, or personal items like TVs or refrigerators, these are not considered part of your home’s basis, even if they remain in the house when you sell.
4. Costs for Selling the Home (Beyond Certain Allowed Expenses): While some selling costs can increase your basis, not all are eligible. For example, the costs of marketing your home or staging are generally not included in your basis. Only certain selling expenses directly related to the transaction are allowed.

Keep Good Records

To take full advantage of these opportunities to increase your home’s basis, it’s essential to maintain accurate and complete records of any improvements or upgrades you make to your home. Keep receipts, invoices, and records of any work completed, as you’ll need this documentation when it comes time to calculate your gain and file your taxes. Remember that you may live in your home for decades and all those basis increasing costs will make a difference when you ultimately sell your home.

Why You Should Consult With an Expert

Understanding how to properly calculate your home’s basis and reduce your tax liability when selling can be complicated. The rules are nuanced, and any mistakes could cost you in taxes. If you’re unsure about how to calculate your basis or if you want to ensure you’re taking advantage of every opportunity to reduce your tax burden, speaking with a tax expert is a wise choice.

In Virginia, the experts at Independent Tax Advisors specialize in navigating the complexities of local and federal tax laws. Whether you’re selling your home, purchasing a new one, or dealing with other real estate transactions, our team is here to help. Don’t risk overpaying in taxes – let us help you maximize your tax savings.

Contact us today to schedule a consultation with our Virginia-based tax professionals and ensure that you’re making the most of your real estate sale!