Question

How do I determine the adjusted basis of my home when I’ve made improvements?

Answer

Home renovations and improvements can require you to adjust the basis of your property. We’ll help you determine the adjusted basis of your home, so you can report it on your taxes. 

To start, let’s talk about the basics. The real estate basis of a property is the sales price plus certain expenses, like:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees, like:
    • Title search
    • Preparation of the sales contract
    • Preparation of the deed
  • Recording fees
  •  Surveys
  • Transfer taxes
  • Owner’s title insurance
  • Closing costs

If you bought the land and home for a lump sum, allocate the basis between the land and the home. This is necessary for rental property because you must calculate the depreciable real estate basis of the property. You can’t depreciate the land.

If you don’t have the record of sale or don’t remember how much you paid, contact your broker or realtor. The county clerk’s office for where the house is located should have records of all home sales in its jurisdiction. You can also look to online historical pricing information from various online resources. Once you find the information you need, be sure to note the source you used. Keep this document with your tax records.

Calculating the Adjusted Basis of Your Property to Account for Home Improvements

You’ll need to adjust the basis of your property for things you did after you bought the home. So, you’d add the cost of additions or improvements to your basis.

Ex: You bought your home for $305,000. The assessed value of the land is $129,000. The assessed value of the improvements is $70,000.

Calculate your real estate basis in the home by subtracting the basis of your land from the purchase price:

$305,000 – 129,000 = $176,000 basis

If you made improvements to the home (Ex: you renovated your kitchen), add the cost to your home’s basis:

$176,000 + $70,000 = $246,000 basis

How to Determine the Basis of Property Received as a Gift or Inheritance

Here’s how to determine the basis of other property you might get:

  • Inherited property is usually the Fair Market Value (FMV) of the property at the date of death.
  • Gifted property depends on if there’s a gain or loss when you sell or dispose of the property:
    • When there’s a gain, that’s the donor’s adjusted basis.
    • When there’s a loss, the basis is the lower of the FMV at the time of the gift or the donor’s adjusted basis.
  • There’s no gain or loss on the sale if:
    • The result is a loss when the basis for figuring gain is used.
    • The result is a gain when the basis for figuring a loss is used.
  • Property that changed from personal to business depends on whether you have a gain or a loss:
    • If you have a gain, you’ll use your adjusted basis.
    • If you have a loss, you’ll use the lesser of the adjusted basis or the FMV at the time the property changed to business use.
    • You’ll adjust the basis for any events that occurred after the property was converted to business use. These include:
      • Improvements
      • Depreciation
      • Casualties and thefts 

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