Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
Fools,

I can and probably will research this on the IRS site myself; but I thought I would ask here to see if I could shorten my research time.

I just purchases a townhouse. The property was in a fairly ideal location; but was in need of some deferred maintenance and improvements. Arguably it was move-in ready; but I did not feel it really met my standards.

Ultimately I bought the place and am about to move into it. However, I spent a good deal of money on repairs - some identified by the inspection and some discovered later - and improvements. I'm wondering what, if anything, could be counted toward the capital cost of the property when I eventually sell it. In other words, I need to know what records will be worth keeping.

The single largest expense is the new flooring and stair treads. I replaced all the old carpet with handscraped bamboo floors. This is clearly an improvement to the property and should also increase the sale price when it eventually occurs. I would think this improvement might be viewed as a capital expense.

However, I also had the house repainted, additional recessed lighting installed and lighting in the crawl space, replaced the powder room vanity and installed new baseboard throughout the house. These are items that provide some improvement in the overall attractiveness of the house; but I'm not sure that they significantly add to the resale.

Finally, there were items that I had to repair or replace - the most expensive item being a collapsed storm drain. These items were either not apparent at first or were simply deferred maintenance. I suspect these items add no resale value to the house and do not add to the appearance of the house.

For those care to keep count, I suspect I would only get about 40 cents on the dollar out of these expenditures; but they were either necessary or desirable to make the property meet my goals.

My question is simply, Can I count any of this as part of my cost basis (for tax purposes) when I resale the house?

It's not like I built an addition to the property; but I'm fairly sure that if I had made these changes as part of preparing the house for resale, I could probably deduct (nearly) all of it. But I also know that if I make repairs during the course of ownership, those repairs are simply an expense.

Your thoughts? Obviously I'm going to go check the IRS website when I get a chance; but I thought some of you might have experience with this issue and could comment. So do you think there is any documentation here worth keeping?

- Joel
Print the post Back To Top
No. of Recommendations: 1
It's not like I built an addition to the property; but I'm fairly sure that if I had made these changes as part of preparing the house for resale, I could probably deduct (nearly) all of it.

That's a common misconception. Fixup expenses in preparation for sale are not deductible, nor do they add to basis. They never were or did.

Before the law changed in 1997 you could include fixup expenses in determining how much you had to spend on a replacement residence, but the whole concept of replacement disappeared in that change in the law.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 1
TMFPMarti,

You wrote, That's a common misconception. Fixup expenses in preparation for sale are not deductible, nor do they add to basis. They never were or did.

Before the law changed in 1997 you could include fixup expenses in determining how much you had to spend on a replacement residence, but the whole concept of replacement disappeared in that change in the law.


Ah. So none of these expenses matter to me?

I realize that you may be able to exclude some or all of the gain on your main home. I intend to move when I retire in perhaps another 8-10 years. However, I may consider converting the place to a rental rather than selling. (I've have to do a cost-benefit analysis on it first.) Does that change the issue at all?

I don't have any experience with any of this - other than that I converted my first residence to a rental back in the last '80s. I sold my last main residence several years ago at a loss and I didn't have any improvements in the place in any case. So even if improvements were an issue, it wouldn't have mattered to me.

Now for the first time I'm dumping money into a place, post purchase and wondering if I should be keeping records. It sounds like your answer is, Probably not.

- Joel
Print the post Back To Top
No. of Recommendations: 1
TMFPMarti,

You wrote, Before the law changed in 1997 you could include fixup expenses in determining how much you had to spend on a replacement residence, but the whole concept of replacement disappeared in that change in the law.

I just went and read the relevant section in Pub 523. According to it, the cost basis is important. See page 8:

Increases to Basis

These include the following.

o Additions and other improvements that have a useful life of more than 1 year.
o Special assessments for local improvements.
o Amounts you spent after a casualty to restore damaged property.


And elsewhere there are the reasons why some or all of your gain may not be tax exempt, which is why determining your cost basis was important in the first place.

Actually from the definitions in Pub 523, all of my changes and improvements may add to my cost basis. They all have a useful life of more than 1 year. There are several reasons I might need to know this basis when I sell:

1. I might convert the property to a rental;
2. I might need to sell the house before 2 years are up;
3. This exemption may be sunset or eliminated before I sell; and,
4. Housing inflation could increase the value of the house by more than $250,000 in the next 10 years. (It could happen...)

OK, none of these are LIKELY to apply to me; but any of them could before I move out.

- Joel
Print the post Back To Top
No. of Recommendations: 7
In the pickiest sense, what you include in your basis is determined at the time you sell, not at the time you expend money that is potentially includable in your basis.

So one course of action would be to retain your documentation for all of these expenses so that you have the records you need in case the expense can be included in the future.

However, basis issues is an area that hasn't changed very much over the years. So that might be a bit of overkill in terms of record keeping.

You may be looking through the wrong lens when thinking about what is included in your basis. The issue isn't really whether the expenditure increases the resale value. I prefer to look at it as including everything that you sell.

Arguably, everything you mention might be included in your basis. You bought the home knowing several things would need to be done to it before you put it into service as your residence. Had those been done by the seller, you would likely have paid a higher price for the house and those costs would have been directly included in your basis through the purchase price (as opposed to being separate from the purchase).

I'd include the current flooring costs unless you later replace that flooring with some other flooring. Painting is a bit iffy, as that's generally maintenance. But the lighting, vanity, and baseboards are all something I'd capitalize.

Even some deferred maintenance issues would be something I'd include in your basis. They were necessary expenditures to make the house usable as your residence. Specifically, I would be inclined to include the storm drain as part of your basis. Here, you were not the one to defer the maintenance. That was the prior owner. You simply took care of those deferred maintenance items as part of your overall plan to acquire the residence and prepare it for service. (On the back end of ownership, if you were the one to defer maintenance issues and then take care of them right before selling, I'd probably recommend a harder line on including them in your basis.)

As far as your own research goes, you could do worse than starting with Publication 551: http://www.irs.gov/publications/p551/ar02.html .

--Peter
Print the post Back To Top
No. of Recommendations: 1
So none of these expenses matter to me?

There are much better informed voices on the board than mine, so pay heed to them. Of the things you listed in your OP the one thing I can think of that would IMO add to basis is the difference in cost between your wood floors and replacement carpeting. Everything else sounded like maintenance to me, which doesn't affect your taxes when it's a personal residence.

Rentals are a different story. If you do convert to rental somewhere down the road maintenance and repairs are deductible against rental income.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top