Save Your Receipts for Tax Breaks When You Sell
One of the primary reasons to buy a home is that it can be an excellent investment. Over time, real estate prices tend to go up, and as you pay down a mortgage, the combined capital gains can add up significantly. Note that when you sell, those gains may be subject to taxation. However, there are some ways you can keep more of that money in your pocket instead of Uncle Sam’s. (As always, be sure to consult your tax professional for the most specific and accurate information.)
First thing to consider is that, if you’ve owned your property for at least two years and used it as your primary residence for at least two of the last five years before sale, you already have a significant shelter built in. Individuals can claim a deduction on up to $250,000, and married couples or registered domestic partners (RPDs) can claim $500,000. Amounts above those are subject to taxation, but you may be eligible for further deductions.
The main thing that works to your favor here is capital improvements. This means any durable upgrade, adaptation, or enhancement of a property that increases its value, prolong its life, or adapt it to new uses. These expenses can be added to the cost basis of your home; in other words, they effectively raise the purchase price of the home, reducing taxable gains.
Examples of capital improvements include (but are not limited to):
Room additions
New roofing
Kitchen remodels
Installation of new HVAC systems
Landscaping improvements
If you've installed energy-efficient windows, doors, solar panels, or insulation, these expenses might qualify you for tax credits. Save all receipts, contracts, and records associated with these improvements, as they can increase your home's cost basis, thereby reducing your taxable gain when you sell.
While routine maintenance and repairs (like fixing a leaky faucet or repainting) do not qualify as capital improvements, it's still wise to keep these records. They might not directly impact your tax situation but can be important for overall home documentation. We recommend keeping a journal of all work you do on your home, with costs annotated. This will come in especially handy when it’s time to fill out disclosures as you prepare to sell.
Some other things that may be deductible include:
Property taxes are typically deductible, and keeping these records help confirm your payments and any adjustments made for the time you owned the home.
Real estate agent commissions, legal fees, and any other costs associated with the sale can be deducted from your selling price, reducing your capital gains.
If you paid points to reduce your mortgage interest rate, keep those records. Points are deductible, and when you sell, any remaining unamortized points can be added to your cost basis. Similarly, if you paid Private Mortgage Insurance (PMI), keep those records as they may be deductible under certain conditions.