Why You Should Keep Receipts for Home Improvements - dummies

Why You Should Keep Receipts for Home Improvements

By Eric Tyson, Ray Brown

Copyright © 2016 Eric Tyson and Ray Brown. All rights reserved.

While you own your home, it’s in your interest to track the amount that you spend on improvements. Why? Well, when you sell your home someday, the IRS allows you to exclude from taxation that portion of your profit that was due to capital improvements.

For tax purposes, the IRS enables you to add the cost of improvements (but not money spent on maintenance) to your original purchase price. What’s the difference? Well, there is a difference, but as with all matters on which the IRS has an opinion, that difference isn’t always crystal clear.

  • Capital improvements are things you do to your home that permanently increase its value and lengthen its life. Capital improvements include such things as landscaping your yard, adding a deck, purchasing new appliances (as long as you leave them when you sell), installing a new heating system or roof, remodeling and adding rooms, and so on.

  • Maintenance and repair expenses, in contrast, include those types of fix-up items that need to be done throughout your home from time to time. Maintenance and repairs include such things as fixing a leaky pipe or toilet, painting, paying someone to cut your lawn and pull weeds, and the like.

So when you buy a home, keep handy a file folder into which you can dump receipts for your home-improvement expenditures. If you’re in doubt as to whether an expense is an improvement or a maintenance item, keep the receipt and figure it out when the time comes to sell your home.