Home Improvements Raise Your Basis for Capital Gain

Why Raising Your Basis Reduces Your Taxes

Any improvements made to the home during your ownership can raise your basis for the property. This will reduce your Capital Gain. IRS calculates capital gain by subtracting the price you originally paid for your property, plus improvements (the Basis) from the amount you received for selling your property. This amount constitutes your capital gain, which is taxable except for the allowed exclusion amount.

As of 2022 tax filings, you can exclude $250,000 of your capital gain if you file separately or are single. If you are married and filing jointly, you can exclude $500,000.

Examples:

If you paid $700,000 for your property, and sold it for $1.2 million, you would have to pay taxes on the money you made, minus the exclusion. For a single person or a person filing separately, this would mean you would pay taxes on $350,000

[$1,300,000 – $700,000 = $600,000] – $250,000 = $350,000.

For a married couple filing jointly, you would pay taxes on $100,000.

[$1,300,000 – $700,000 = $600,000] – $500,000 = $100,000

Impact of Home Improvements on Raising your Basis

Going back to our initial statement, home improvements made during the time you owned the property are added to the cost basis. Therefore, if you added a patio and yard improvements to the property which cost you $100,000, the Taxable Capital Gain equation changes.

For a single person or a person filing separately, you would pay taxes on $250,000.

[$1,300,000 – ($700,000 + $100,000) = $500,000] – $250,000 = $250,000

For a married couple filing jointly, you would NOT pay a capital gain tax.

[$1,300,000 – ($700,000 + $100,000) = $500,000] – $500,000 = $0

So, as you can see, home improvements raise your basis which reduces the amount you will be taxed. This could be important since higher market values could be approaching the maximum exclusion on As you can see, keeping track of and including any home improvements you have made during the life of the property can make a significant financial impact on your home sale. To find out more information on this topic, download IRS publication 523 and consult a tax professional before you sell your property.

At Sound Investments, Inc. we have a tax professional on staff who can explain capital gain ramifications of your sale. Make sure you account for this tax break you are entitled to. CLICK HERE to contact us about selling your property and how that will impact your taxes.