Recordkeeping for Individuals - Personal Residence Tips

The 1997 Taxpayer Relief Act permits most homeowners to exclude up to $250,000 of the gain realized on the sale of a principal residence (couples may exclude up to $500,000). Unfortunately, this is not a benefit to everyone since, under the new law, homeowners can no longer use the technique of purchasing a new residence at least equal in value to their old home. Instead, all gain over and above the exclusion amount is immediately taxed on the sale of the home. Avoiding this new pitfall requires careful planning. Homeowners who have more than $250,000 in potential gain now, or can project that amount of gain when they eventually sell in the future (think of how much gain inflation can produce over a ten year period), should consider keeping careful records of expenses to reduce their eventual tax. (Although married couples are entitled to exclude $500,00 in gain, divorce, death, and other situations make it imperative that planning be based upon the $250,000 figure "just in case.") 

The kinds of expenses we're talking about increase the tax basis of your home and therefore decrease taxable gain. They fall into two basic categories: those incurred at the time you buy your home and those made for improvements that materially add to your home's value or prolong its life. Just making the expenditures is not enough. You must keep receipts, canceled checks or other proof. Otherwise, you risk being limited to your original cost when you sell. 

Acquisition costs to be alert for include: 

• Inspection fees (termite, structural, radon), 
• Transfer taxes,
• Notary fees, 
• Legal fees, 
• Closing costs, 
• Deed and mortgage recording charges, 
• Appraisal and evaluation fees, 
• Title search costs, 
• Title insurance premiums, and 
• Survey costs. 

Improvements, alterations, replacements, and additions that typically reduce gain include: 

• New roof, 
• Additions (porch, deck, terrace, patio, garage), 
• Bathroom renovation, 
• Kitchen remodeling, 
• Fences and gates, 
• Sprinkler system, 
• Central heating or air conditioning equipment, 
• Heating oil tank, 
• Insulation, 
• Intercom system, 
• Vinyl siding, 
• New gutters, leaders, and drain pipes, 
• New stairs, walkways or driveway, 
• In-ground swimming pool, 
• Storm windows and doors, screens, 
• Telephone and cable outlets, 
• Electrical wiring, service panels, and outlets, 
• Septic tank (new or replacement), 
• Conversion of basement or attic to living space, 
• Moving or paneling of walls or partitions, 
• Fireplaces, 
• Trees, shrubs, and topsoil, 
• Security system, 
• Closets, cupboards, or room dividers, and 
• Window replacements. 

Expenses that keep your home in good repair usually won't reduce your gain unless they are part of an extensive remodeling or renovation plan. We will be happy to discuss any specific questions you may have with respect to classifying expenses and setting up audit-proof record-keeping. Also, if there is a possibility you might sell your home soon, we can advise you on the technical and sometimes intricate rules for lowering or excluding gain. 

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