One important concept that many people overlook is your home’s tax basis.
Your home’s tax basis is simply the amount the IRS uses to figure out your gain or loss when you sell your home. What many people don’t realize is that your cost basis isn’t frozen in time. It can grow and change as you make improvements over the years.
Understanding how this works can help you be a wise steward of your home and your finances. Below are four keys to understanding your home’s cost basis for tax purposes.
1. Home Improvements Can Increase Your Home’s Cost Basis
Your home’s cost basis usually starts with what you paid for the house. But it doesn’t stay there. The IRS allows you to add certain improvements to your basis if they increase the value of your home, extend its life, or make it more adaptable.
These are often called capital improvements, and they can make a real difference later on down the road when it comes time to sell you home.
Large Improvements That Increase Cost Basis
The costs associated with these larger projects could potentially raise your cost basis because they add long-term value:
- Adding a room
- Renovating a kitchen
- Installing a new air-conditioning system
- Finishing a basement
- Putting in new landscaping
Smaller Improvements That Count Too
Even smaller upgrades may increase your basis:
- A new window or door
- Updated duct or furnace work
- Wall-to-wall carpeting in a room
- Built-in appliances
- A new water heater
- Home security systems
These may not feel as dramatic as a full remodel, but they still add to your home’s long-term usability and value.
2. Repairs Usually Don’t Increase Basis
Not every project gets added to your basis. Regular repairs and maintenance—things like painting, fixing a leak, or patching drywall—help keep your home in good shape, but the IRS does not allow these costs to increase your basis.
A simple way to remember it:
If it maintains your home, it’s a repair and does not increase your cost basis. If it improves your home, it may increase your cost basis.
3. When Your Basis May Go Down
Most of the time, your cost basis goes up—not down. But there are exceptions. If you ever:
- Rented out part of your home
- Used a portion of your home exclusively for business
…then you may have claimed depreciation on that space. Depreciation lowers your basis over time. Even if you didn’t actually claim it but you were eligible to do so, the IRS still requires you to reduce your basis when you sell.
4. Good Records Make Life Easier
One of the most helpful habits you can build as a homeowner is keeping a simple file of receipts, invoices, and before-and-after notes about your improvements. When it comes time to calculate your tax basis, you’ll be grateful that you have everything in one place. Clear records help ensure that you keep more of the money you’ve earned and avoid headaches down the road.
Understanding your home’s tax basis is an important (yet, often overlooked) part of responsible homeownership. When you know which improvements increase your basis—and which expenses don’t—you’re better prepared for the financial decisions that come with owning and eventually selling a home. Taking time to track your upgrades, maintain good records, and stay aware of the IRS guidelines can make a meaningful difference at tax time for you and your loved ones.
Disclaimer: This information is not intended to be a substitute for specific, individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend that you discuss your specific situation with a qualified tax or legal advisor.
Sources:
Kiplinger
IRS