Keep notes during home improvement to avoid mistakes


Your first home improvement won't be your last. It is important to learn from the mistakes that you made the first time about so that you do not repeat them. One of the best ways to do this is to keep good notes during your project. Documentation serves many purposes. If a snafu occurs during the project, you'll have a written record. Right after the project is more than, these notes will help you to identify which contractors you will hire again - and those you won't.

But the most essential cause to keep good records is that your home, like most, will eventually be sold.When it does sell, there may be tax consequences. You will find special tax exclusions that apply to the sale of a house used as a principal residence. Generally speaking, you may exclude as much as USD 250,000 of gain on the sale of such a home. To benefit from the exclusion, you must meet certain ownership and use tests and you can't use the exclusion more than once every two years.

To minimize, or even eliminate, paying taxes on the sale of your principal residence, you must keep accurate records in order to calculate the gain or loss that is realized on the sale. The gain or loss is calculated by subtracting the adjusted basis from the sales cost of the house.

For instance, let's say you purchased your home in 1985 for USD 160,000. In 1986, you put on a brand new roof for USD 4000. In 1998, you installed a brick patio for USD 6000. In 1990, you remodeled the kitchen for USD 40,000. In 1995, you added on a family room for USD 50,000. If you add those improvements to your original purchase price, that increases your adjusted basis to USD 260,000.

Now let's say you sell this house today for USD 313,000 and pay a USD 3000 commission to the real estate agent. Subtract the commission from the gross sales price and your net sales cost is USD 310,000. From USD 310,000, subtract your adjusted basis, and your gain is USD 50,000.

Without accurate records, you can't prove your USD 100,000 investment in house improvements. This would increase your USD 50,000 gain by twothirds, to USD 150,000! Here are examples of permanent home improvements that increase the value of your home and may be added to your basis:

However, there are a couple of items that decrease your basis. They include any improvements that are no longer part of your home, such as removal of carpeting, flooring, or fencing, and any gain you postponed from the sale of a previous home prior to May 7, 1997. Also, routine maintenance of your house, such as painting and repairs, doesn't generally increase the basis of your home.

The USD 250,000/USD 500,000 gain exclusion minimizes the need for accurate records in many cases simply because you will find no tax consequences. Nevertheless, you will find some situations exactly where you can finish up having to pay taxes, including:

If you're unsure concerning the rules consult your tax advisor. Even though you may not end up paying any taxes, you must be able to prove you qualify for the exclusion and prove your gain is below the USD 250,000 or USD 500,000 threshold. It is essential to remember that if you've rented your home or taken depreciation on it, a portion of the gain may not qualify for the exclusion.

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Note: This article was sent to us by: Anthony C. Lee at 01282011

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