Adjustments to Your Home's Basis

Over the years that you own your home, your initial tax basis may need to be adjusted to reflect several kinds of events.

The most common reason for an addition to your basis is that you made a permanent improvement, such as a room addition, kitchen remodeling, installation of air conditioning or heating, new sidewalks or landscaping, etc. "Improvements" are generally defined as things that add to the value of the home, prolong its useful life, or adapt it to new uses. In contrast, "repairs" are things that keep your home in good working condition and maintain, but do not add to, its value. However, if jobs that would normally be considered repairs are done as part of a larger improvement project, all of the expenses can be treated as an improvement and added to your basis.

Planning Tools You may find it helpful to use a form, like this capital improvements worksheet, to keep track of your home improvements over the years.

As you complete and pay for improvements, you should retain receipts and canceled checks for the payments you make.

Besides additions or improvements, you may need to record an increase in your home's tax basis if you pay a special assessment to your taxing body for a local improvement such as a sidewalk, paving an alley, etc.

Save Money Although the list of improvements included in the form concentrates on big-ticket items, remember that an improvement need not be large in order to be deductible. For example, drapery rods, window shades, bathroom towel racks, updated lighting fixtures, and even new handles on your kitchen cabinets can all be considered "improvements." If you keep careful track of these items over the years, they can really add up.

Decreases to your basis will need to be made for the following amounts:

• payments you receive for granting an easement or right-of-way
• depreciation, if you used your home for business or rental purposes
• residential energy credit claimed for the cost of energy-related improvements that you added to the basis of your home
• energy conservation subsidy that was excluded from your gross income because it was received from a public utility after 1992 to buy or install any energy conservation measure
• adoption credit you claimed for improvements that you added to the basis of your home, and nontaxable adoption assistance received from your employer that you used for improvements that you added to the basis of your home.

If you have a casualty loss, you must adjust your basis as follows:

• Decrease your basis by any loss you recognized.
• Decrease your basis by any money received, such as an insurance reimbursement, that was not spent to repair or replace the property.
• Increase your basis by any gain you recognized.
• Increase your basis by any unreimbursed costs paid to repair or replace the property.

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