Should you keep track of your expenses (and receipts) from home improvement projects?  What are the tax consequences?

Taxes

Generally, there are no tax breaks for most home improvement/remodeling projects (excluding those projects that qualify for some type of tax break based on energy savings) in the year that you make the improvements.

From Jackson Hewitt:

The terms repairs and improvements can be confusing as it applies to the value of your home. A repair or maintenance expense is not tax deductible and cannot be added to the basis of your home. An improvement adds to the value of your home and is added to the basis. Adding vinyl siding and installing a security system are examples of improvements.

Capital Gains

The original cost of your home plus any improvements is used as the cost basis. This cost basis is used in determining capital gains tax liability. Home improvements will increase your cost basis thus decreasing your capital gains liability.  (A capital gain is paid on the appreciation in price of an asset between the time it is bought and the time it is sold).

Capital Gains on Primary Residence

A large majority of home owners will never pay capital gain tax on the sale of their primary residence.  Current tax law excludes $250,000 (single) or $500,000 (married) in capital gains on the sale of your primary residence.  So unless you're going to make a large amount of money on the sale of your house, those additional home improvement expenses won't help with capital gains taxes.

Over your lifetime, your home could appreciate quite a bit.  If you've made major improvements to your home, track those expenses and keep those receipts.  You may need them one day.

The tax laws could change.  Congress could just as easily eliminate this freebie in the tax code.  Considering that home ownership is long term activity (outlasting many presidents, congresses and tax laws) tracking improvements is a good idea.

I keep a spreadsheet with a list of the major improvements and repairs.  I also track the date and cost of the improvements/repairs.  I scan the receipts and store them on my computer.  Many of the thermal receipts stores print today don't last that long and will start to fade in only a few years.

This information is handy when selling your house.  Home buyers want to know how old the major stuff is.

So track your home improvement expenses.  It just might be worth it someday.

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