Adjusted Basis: Improvements vs Repairs
Adjusted basis is the running tax cost of your home. Amount realized minus adjusted basis equals gain or loss before Section 121. Publication 551 explains basis of assets in general; Publication 523 applies those ideas to a residence. Getting basis wrong is one of the fastest ways to misstate taxable gain even when the exclusion math is perfect.
Starting basis
If you bought the home, starting basis is generally what you paid for it — the purchase price — plus certain settlement fees and closing costs that are capitalizable rather than deductible. Loan fees you deducted as interest do not also increase basis. If you built the home, basis includes construction costs. If you inherited it, basis is often fair market value on the decedent’s date of death or the alternate valuation date if the estate elected it. If you received it as a gift, carryover basis rules and possible gift-tax adjustments apply. Divorce-related transfers between spouses often carry over basis under Section 1041 concepts. SaleGain’s basis worksheet is built for the common purchase-plus-improvements path; other origins need Publication 551 and professional help.
Increases: improvements, not cosmetics alone
Capital improvements add to basis when they add value to the home, prolong its useful life, or adapt it to new uses. Examples commonly discussed in IRS materials include a room addition, a new roof, a new HVAC system, upgraded plumbing or wiring, and a patio or driveway that is part of the property’s capital structure. Special assessments for local improvements can also increase basis in situations the publications describe.
Repairs and maintenance — repainting, fixing a leak, replacing a broken pane — generally do not increase basis even though they cost real money. Borderline projects exist: a “repair” that is really a gut renovation may be an improvement in substance. Keep invoices that describe the work, not just credit-card totals. Photographs before and after large projects help if questions arise years later.
Decreases you must not ignore
Depreciation allowed or allowable while the home (or part of it) was used for business or rental decreases basis. Energy credits or subsidies that require a basis reduction decrease basis. Casualty losses that reduce basis under the Code decrease basis. If you previously postponed gain under older rollover rules that still affect some long-held properties, that history can change starting basis — another Publication 523 specialty.
For Section 121, remember the separate rule: depreciation after May 6, 1997 is not excludable even when ownership and use tests are met. Lowering basis through depreciation therefore often raises gain and leaves a taxable slice. Track rental Form 4562 history before you sell.
Settlement costs at purchase
Some buyer closing costs are added to basis; others are deductible in the year paid or not deductible at all. Publication 551 lists categories such as abstract fees, installation of utility services, legal fees for the purchase, recording fees, surveys, transfer taxes, title insurance, and any amounts the seller owed that you paid. Do not double-count points you already deducted. Do not add escrowed property taxes that you instead deduct as taxes.
Worked path
Jordan bought a house for $300,000, paid $5,000 of capitalizable closing costs, added a $40,000 kitchen remodel treated as an improvement, and later claimed $15,000 of depreciation during a rental period. Adjusted basis = 300,000 + 5,000 + 40,000 − 15,000 = $330,000. If amount realized on sale is $470,000, gain before exclusion is $140,000, and at least $15,000 related to post–May 6, 1997 depreciation concepts may remain outside Section 121 depending on the years depreciation was taken. Plug the same figures into SaleGain’s worksheets to see the arithmetic laid out.
Records that survive a move
Store digital copies of the purchase closing disclosure, improvement contracts, cancelled checks or statements, building permits, and depreciation schedules. Cloud folders labelled by year beat a single shoebox. When you sell, the records guide lists what to retain after closing. Basis work done the week before filing is painful; basis work done over the years you own the home is ordinary.
If you cannot reconstruct every receipt, you may still document some improvements with secondary evidence, but expectations should be conservative. Inventing figures is never acceptable. A lower proven basis that you can defend is better than an inflated basis you cannot.
Contractor invoices worth keeping
Ask contractors to describe materials and the nature of the work on the invoice. “Remodel per contract” is weaker than “remove existing galley kitchen; install cabinets, stone counters, electrical for island, and plumbing for dishwasher.” Payment apps that show only a person’s name and a dollar amount should be paired with the underlying proposal. For DIY projects, keep material receipts from lumberyards and big-box stores in a folder labelled with the project name and year.
HOA special assessments sometimes fund capital improvements to common areas that increase your basis in a condo. Other assessments fund operating shortfalls and do not. Read the assessment notice and, if needed, ask the association which category applies before you add the amount to a worksheet.
When improvements and repairs happen together
A roof replacement after a storm can blend insurance proceeds, repairs, and capital improvements. Casualty loss rules, basis adjustments, and insurance exclusions interact. Publication 547 (casualties) may join Publications 523 and 551 in your reading list after a major event. SaleGain does not model casualties beyond a simple basis-decrease field; treat that field as a place to enter a figure you already computed.
Energy-efficient upgrades may involve credits that require basis reductions. If you claimed a residential energy credit that mandates a basis decrease, enter it on the worksheet’s energy line rather than leaving basis overstated.
Land versus building allocation
Purchase price often covers land and building together. Land is not depreciated, and when a property was rented, only the building portion should have been depreciated. For a personal residence that was never rented, a combined basis figure may be enough for Section 121 math. For a former rental, separating land and building using original appraisals, tax assessments, or a reasonable allocation method becomes important so that depreciation and basis decreases are not applied to land. Publication 551 discusses allocation. If your assessment records show land and improvement values, keep a copy with the basis folder.
When you sell, the contract rarely splits land and building for you. The tax allocation is your responsibility based on records. SaleGain’s single adjusted-basis input expects the total figure you have already assembled.