Cost basis for your house: How to track it?

[Brian Elfert]

How do you track the cost basis for your house to know if you owe capital gains tax at time of sale? I paid $150,000 for my house in 2014 and have spent at least $150,000 on improvements since I bought it. The house is now worth around $400,000. I could see easily exceeding my $250,000 allowance at sale time years or decades down the road.

A lot was DIY so I have stacks and stacks of receipts. I spent at least $110,000 before I even moved in on a complete interior and exterior overhaul because the previous owners never fixed anything and destroyed the house.

[Bill Dufour]

In California if you live in the house as your primary residence for something like 3 of the last 5 years the sale is not taxable income if the money is used to buy another house of equal value. Up to 250,000 profit or 500,00 for a couple is tax free.
There is probably some rule about only once in a lifetime tax break. Often a lifetime means five years apart.
Many of the rebates to install energy efficient stuff require a licensed contractor to do the work. This added cost cancels out the rebate in most cases if you can do it yourself. Some homebuilders install ugly energy efficient kitchen and bath lights and after the final inspection they will take them away and install better stuff the buyer pays for at no installation charge.
Bill D

[Bill Dufour]

Your figures say you have a 100,000 profit now.
400,000 -150,000-150,000= $100,000 profit
250,000 profit is tax free for individuals. I think you have to have lived in the house for 2 of five years.
I believe this is both federal and at least California and Oregon tax law. Your state I have no idea.
Bill D

[Bill Dufour]

When we sold out first house we paid more for our next house so there was no profit according to tax law. No one needed to see those receipts I had saved for years.
Bill D

[Paul F Franklin]

As you know, the first 250,000 of capital gains if you're single, 500,000 if filing jointly, are exempt from long term capital gains (assuming it's your primary residence and you've lived there at least 2 years). Qualifying home improvement costs (almost everything that is an improvement and not a repair or routing maintenance qualifies) essentially get added to the exemption. So if you have 110,000 of qualifying improvements you now essentially have a 360,000 exemption (610,000 if married filing jointly). I keep a file box of every receipt for home improvements. I don't keep track of them or total them or anything, just throw the receipt in the box. When I sell, someone gets to add them up, but only if necessary because the gain is higher than the exemption. If someone inherits the property, their cost basis is usually the fair market value at the time they take title. So I kick the issue down the road with the cost of a file box.

Of course, as Bill points out, if you sell and buy a more expensive house, it's all moot.

[Bill Dufour]

When us kids inherited our mothers house it was sold. The cost basis was the market value on the day she died. So there were only a few thousand in profits from the sale since it increased in value while we straightened out the legal stuff and cleaned it up.
Cost 14,000+12,000 addition. value at death 1.3 Million, profit under 5,000 in increased market value.
BilLD

[Jim Koepke]

How do you track the cost basis for your house to know if you owe capital gains tax at time of sale?

This is one of those legal issues that may vary by tax codes in different states. The federal tax may also be something for which a professional consultation should be made.

Some states, like California, even have property tax issues. My old home in California had a grandfathered in basis on its property tax. If we had bought another house in the same county we could transfer the lower rate.

Every state may have some legalese in their tax code with allowances for people selling property at a gain.

jtk

[Brian Elfert]

My question is how do I track the cost basis of the house? Do I really have to keep hundreds of receipts to prove all the money I spent on home improvements? If the receipts were somehow lost would I be screwed? If I had no receipts for any of the work the IRS might look at the sale price of $150,000 and say I am already at the $250,000 limit for the capital gains exemption. My understanding of federal tax law is a single person has a $250,000 capital gains exemption when selling a house and a couple has a $500,000 exemption. I believe the old rule of rolling over to a more expensive house is long gone. I think if you bought a house in say the 1980s for $250,000 and you sell it at retirement with say a $750,000 profit that you would owe federal capital gains tax on $250,000 even if you bought another $1 million house.

My parents bought a house in California in 1979 due to a job transfer. They sold the house in 1981 due to another job transfer back to Minnesota, but due to the California housing market they made a pretty decent profit on the house. The house my parents bought (and still live in) was less expensive than the house in California. They had to make some improvements to the new house so they didn't get taxed on the profits from the California house.

[Brian Elfert]

Your figures say you have a 100,000 profit now.
400,000 -150,000-150,000= $100,000 profit
250,000 profit is tax free for individuals. I think you have to have lived in the house for 2 of five years.
I believe this is both federal and at least California and Oregon tax law. Your state I have no idea.


My concern is by the time I sell many years down the road I will most likely be over the $250,000 exemption. Even more so if I can't prove the cost basis with all my improvements.

[Paul F Franklin]

My question is how do I track the cost basis of the house? Do I really have to keep hundreds of receipts to prove all the money I spent on home improvements? If the receipts were somehow lost would I be screwed?

Yes, you have to keep the receipts if you want to be absolutely sure the IRS will accept your adjusted basis. You might get lucky and the IRS may take your word on the basis; proof would only be required in the case of an audit or if the IRS request further documentation. If the value you claim as adjusted basis seems reasonable for the time you've had the home and the market you are in, you might be OK, but IIWM, I wouldn't take the chance. They *might* accept alternative evidence, such as a detailed log of improvements made, including material costs, but again, why take the chance.

BTW, the cost of *your* labor as homeowner is not included in the cost of improvements, only materials and the cost of contractors or other professionals you hire to make improvements.

[Bill Dufour]

FYI When you inherit your parents stock portfolio the cost basis is the value on the day of the legal transfer. Basically the price on the day you die is the cost basis. When you sell them any tax is considered a long term gain or loss.
So if you sell them in one week you only pay taxes on the price change for that one week. The tax is calculated as a long term gain at a lower rate then a short term gain. Normally you have to hold a stock to claim the profits as a long term gain.
BilL D

[Perry Hilbert Jr]

If I recall correctly from the income tax course I took 30 some years ago, cost basis of inherited property has different rules from the usual situation of a person owning the house for 10 or 15 years and selling it. a gift during the life of the giver, tranfers at the cost basis of the giver. an Inheritance has the cost basis of FMV at date fof death. (And as I recall, the IRS was not please about the loophole)

I paid $140K for my place in 1992. But the original house was lost in a fire and we spent over $300K on new house, barn construction and rehabbing other buildings. Probably 15K over the years regrading the driveway. Plus purchasing additional adjoining property, also spent over 5k on fencing in the past 5 years. I am not sure how expenditures for a farm differentiate from the residence on the farm, when the farm is sold.

I just recently was told of a odd loop hole for where one spouse is retired and the other still works. When the house was sold, the husband purchased a residence at a resort out of state and his wife purchased smaller residence close to her job. Hubby changed residency, his truck registrations and registered to vote in the resort location. As a result, hubby qualified for a residential mortgage on the resort property, got the property tax credit for seniors in the new state, etc. Wife continued where she worked Now the commute back and forth between places but supposedly got special treatment on the sale of their home and capital gains tax because they became residents of different states and bought separate properties. Sounds strange enough to be true.

[Lisa Starr]

I scan each receipt as I purchase the item and enter the amount onto a spreadsheet. The spreadsheet has tabs for various categories like plumbing, electrical, flooring etc mostly for my own curiosity. The summary page totals the tabs and contains the initial purchase price, so I always know the current costs of the home. The scanned receipts are in a big box in the attic should I ever need the paper copies.

[roger wiegand]

I've been tracking my expenses in Quicken since it (or its predecessor) was introduced. I have a category called "home improvements" where all those expenses are logged. I expect it's for naught, I've never known anyone fortunate enough to be taxed on the sale of a property, and something really bad would have to happen for me to sell this house while I'm still alive. I think that real estate, like other capital assets transfers with a step-up in basis when it is inherited, hence no capital gain at that point.

[Brian Elfert]

BTW, the cost of *your* labor as homeowner is not included in the cost of improvements, only materials and the cost of contractors or other professionals you hire to make improvements.

No, I am not including any unpaid labor. I wouldn't even want to know how much labor has been put into my property.

[Brian Elfert]

I scan each receipt as I purchase the item and enter the amount onto a spreadsheet. The spreadsheet has tabs for various categories like plumbing, electrical, flooring etc mostly for my own curiosity. The summary page totals the tabs and contains the initial purchase price, so I always know the current costs of the home. The scanned receipts are in a big box in the attic should I ever need the paper copies.

Unfortunately, I never started doing this when I bought my house so I have hundreds of receipts to scan in. I should start on the project when I have bits of extra time. I scanned in all the receipts for my solar project to get my 30% credit.

[Bill Dufour]

I do not think hiring someone to run a dozer over the driveway every few years can be added to the cost basis. I would think adding one more bag of gravel with the exact same dozer work could be included in the cost basis. This is a total guess here.
For a mining claim paying for dozer work on the access road is all that is required to show continuing investment before any profits are made.( to keep a claim valid you must put work or money into it). There is no requirement for the claim to ever make a profit or even produce any sellable material.
Many people own mining claims that are just summer cabins on government land since the cabin is a nessacry office structure for the operation as is the garage and driveway.
Bill D

[Brian Elfert]

Routine maintenance cannot be added to the cost basis of a house. However, improvements can add to the cost basis. Paving a gravel/dirt driveway would be an improvement. I am not sure if tearing up a paved driveway and having it repaved would be an improvement or maintenance. I am thinking maintenance.

[Zachary Hoyt]

Would replacing old wooden single pane windows with modern windows be an improvement or maintenance? I doubt I'll ever come near the capital gains threshold, but I have receipts for all the things I bought to work on the house.

[Lisa Starr]

Zachary, My CPA says new windows are an improvement. Painting the old ones would be maintenance.

[Michael Drew]

Study up on a 1031 exchange if you plan to sell your home or second home or property. If you plan for it, and you do not "need" the cash/profit from the sale, you exchange up indefinitely - and not pay capitol gains tax until you finally cash out. It is time sensitive though, so make sure you know the rules before you play.

[Lee DeRaud]

Some states, like California, even have property tax issues. My old home in California had a grandfathered in basis on its property tax. If we had bought another house in the same county we could transfer the lower rate.
As of a couple of years ago, the 'same county' thing went away. But that whole deal applies only to seniors.

One gotcha is that actual changes made to a house will be assessed as of the time they're done and bump up the assessed value. So a bunch of money put into the house might help with capital gains tax when selling, but will cost more in property taxes in the meantime. I got dinged when I redid the back landscaping because the new patio cover was bigger than the one it replaced: the assessment increase was the cost of the new one divided by the percentage size increase.

[Brian Elfert]

It sounds like I need to keep all my receipts until I sell my house at some point in the distant future.

[Edwin Santos]

Study up on a 1031 exchange if you plan to sell your home or second home or property. If you plan for it, and you do not "need" the cash/profit from the sale, you exchange up indefinitely - and not pay capitol gains tax until you finally cash out. It is time sensitive though, so make sure you know the rules before you play.

Before going down this road, consult with a professional about whether a primary residence is eligible for 1031 exchange. In my opinion it is generally not. However, there are conditions under which you could convert the property into a rental/investment property at which point it would become eligible for a 1031 exchange.

Otherwise, in answer to the original question, start an Excel worksheet and enter in the receipts and all other costs that you can document. It may seem like a daunting task, but chip away at it, and you'll get there. Personally I'd scan the original receipts, but if you like you can just set them aside somewhere once they are recorded on your cost schedule. The only reason you would need them later would be if the IRS or state challenges your schedule of costs.

[Jim Koepke]

As of a couple of years ago, the 'same county' thing went away. But that whole deal applies only to seniors.

Thanks for the clarification Lee. I moved out of California almost 15 years ago so haven't kept up much with their laws.

Their Franchise Tax Board seems to have troubles keeping up with my tax filing. Much of my income is associated with California. Many years ago there was a case of someone who retired from California but moved to another state who didn't think they should pay income taxes to California. The case came out in their favor on retirement and trust incomes.

A few times in the last few years the California TFB has only sent a partial wired deposit refund on my taxes and then a few weeks to a month later sends me a check for the rest.

My tax preparer said it is likely all of the paper involved gets scattered before it all comes together.

jtk

[Lee DeRaud]

Their Franchise Tax Board seems to have troubles keeping up with my tax filing.
My favorite stunt of theirs was when I filed my deceased mom's last federal return from my own address. Apparently FTB gets confused when a federal return comes from California and there's no corresponding state return. Took me several months to convince them that, no, she did not live in California (or anywhere else at that point), and had never earned income here.

[Lee DeRaud]

My tax preparer said it is likely all of the paper involved gets scattered before it all comes together.
What is this "paper" you speak of? :)