If you’re selling your Gulf Shores home after you’ve made substantial improvements, known as capital improvements, the money you spent on those improvements could help lower your tax bill when you sell.
Tax rules let you add capital improvement expenses to the cost basis of your Gulf Shores home. Why is that a big deal? Because a higher cost basis lowers the total profit, or capital gain, in IRS-speak—you’re required to pay taxes on.
The tax break doesn’t affect everyone. Most home owners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to keep up with your capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.
How Improvements Can Affect Your Gulf Shores Home Cost Basis
To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your Gulf Shores home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name just a few. You should be able to find all those costs on the settlement statement you received at your closing, also known as your HUD-1 Statement.
Next, you need to account for any subsequent capital improvements you made to your Gulf Shores home. Let’s say you bought your home for $300,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $325,000.
If you lived in your home as your main residence for at least two out of the last five years, any profit you make on the sale will be taxed as a long-term capital gain. You sell your Gulf Shores home for $575,000. That means you have a capital gain of $250,000 (the $575,000 sale price minus the $325,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.
Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you saved about $5,000 in taxes based on the 15% tax rate on capital gains. Well worth taking an hour a month to organize your home-improvement receipts, wouldn’t you say?
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.