Homeowners: Get Help With Your Tax Returns

And even if you are feeling broke from buying that house, don’t scrimp on tax preparation. Hiring an accountant to ensure you complete your return correctly and maximize your refund is a good idea. Homeownership significantly changes most people’s tax situations and the deductions they are eligible to claim.

Keep Receipts for Improvements

When you sell your home, you can use these costs to increase your home’s basis, which can help you maximize your tax-free earnings on your home’s sale. For example, back in 2008, you could have earned up to $250,000 tax-free from the sale of your home if it was your primary residence and you had lived there for at least two of five years before you sold it.

Let’s say you purchased your home for $150,000 and were able to sell it for $450,000. You’ve also made $20,000 in home improvements over the years you’ve lived in the home. If you haven’t saved your receipts, your basis in the house, or the amount you originally paid for your investment, it is $150,000. You take your $250,000 exemption on the proceeds and are left with $50,000 of taxable income on the sale of your home.

However, if you saved all $20,000 of your receipts, your basis would be $170,000, and you would only pay taxes on $30,000. That’s a considerable saving. In this case, it would be $5,000 if your marginal tax rate is 25%.

Again, always consult your tax accountant for possible savings and tax impacts.

Repairs vs. Improvements

Unfortunately, not all home expenses are treated equally to determine your home’s basis. The IRS considers repairs to be part and parcel of homeownership, which preserves the home’s original value but does not enhance its value.

This may not always seem true. For example, if you bought a foreclosure and had to fix a lot of broken stuff, the home is worth more after you fix those items, but the IRS doesn’t see it that way as you did get a discount on the purchase price because of those unmade repairs, after all. It’s only improvements, like replacing the roof or adding central air conditioning, which will help decrease your future tax bill when you sell your home.

For gray areas (like remodeling your bathroom because you had to bust open the wall to repair some old, failed plumbing), consult current IRS stipulations and chat with your accountant. Just remember to be thoughtful and do your homework, don’t trick yourself into thinking it’s okay to spend money on something because it’s a necessary “repair” when in truth, it’s a fun improvement. That isn’t good for your finances. Talk with a professional and seek guidance first.