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<I understand that carpet replacement would be maintenance but what if you ripped out the carpet and replaced it with hardwood floors?>

One of the things not really mentioned in this thread is that your question will likely end up as "much ado about nothing". You should know the area that you are moving into. You should also know what your long range plans are. I would keep records of the various permanent improvements I made, but I would not spend a whole lot of time worrying about it. The 500k exemption on gains for a couple would make much of this debate moot.

If you buy your home for 200k, it would need to sell for 700k before you would even need to take a pencil to paper. In that case if you had put 100k of permanent improvements into the house, you would have to sell it for 800k before taxes would become an issue (since your modified basis would now be 300k). Any costs of selling an 800k house would also lower your potential gain. With a 6% sales commision you would now have to exceed 850k on your sale price before CGs became an issue.

I know that I should include the usual disclaimer that congress always can come in and change the rules again. Still, I think that seeing the larger picture may save you from spending an inordinate amount of time worrying over the tracking of your expenses.

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