What a remodel adds to your home's cost basis

A remodel can change two different numbers. One is what you spend this year. The other is your home's basis, the figure the IRS uses when you eventually sell. Basis starts with what you paid and then moves up or down. Improvements are one of the things that move it up. This page is about that second number. For the week-to-week budget, see how to track remodel spending.

What the IRS treats as an improvement

Publication 530 says an improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. You add the cost of improvements to the basis of your home. You cannot deduct those costs. Publication 530's examples include adding a bathroom or bedroom, new plumbing or wiring, a new roof, and paving a driveway (IRS Publication 530).

Publication 523 uses the same idea in slightly different words: improvements add to the value of your home, prolong its useful life, or adapt it to new uses, and you add their cost to basis. Its examples include a kitchen modernization, built-in appliances, flooring, and wall-to-wall carpeting (IRS Publication 523).

The amount you add is your actual cost. Publication 530 says that includes costs for material and labor, except your own labor, and expenses related to the improvement. Its example: if you paid to survey the lot in order to put up a fence, the survey is part of the fence. Your own unpaid time is not a basis increase.

Repairs, and the remodeling exception

A repair keeps the home in ordinary, efficient operating condition. It does not add to value or prolong life. Publication 530 says you generally cannot add repair costs to basis, and you cannot deduct them either. Its examples include repainting inside or out, fixing gutters or floors, fixing leaks or plastering, and replacing broken window panes.

Both publications say the same exception: repairs that are part of an extensive remodeling or restoration are treated as improvements, and you add them to basis. Publication 523's example is a broken windowpane, which is a repair on its own, and the same window replaced as part of replacing all the windows, which counts as an improvement. Painting the rooms you are remodeling, done as part of that job, is the sort of item this exception is about. Painting a room by itself is the sort of item the repair list is about. If you are unsure which bucket a bill falls in, ask a tax professional. This page is not that advice.

Costs that do not stay in basis

• Something you later replace. Publication 530's example is wall-to-wall carpet you installed and later replaced. The old carpet is no longer part of adjusted basis. Publication 523 says the same about improvements that are no longer part of the home.
• A short life. Publication 523 says you cannot include an improvement with a life expectancy, when installed, of less than 1 year.
• Your own labor. Excluded, as noted above.
• Energy credits and subsidies. If you included the cost of an energy-related improvement in basis and you received a credit or subsidy for it, Publication 523 says you subtract that credit or subsidy from basis. Publication 530 says the same about an energy-conservation subsidy from a utility: reduce basis by that value, and do not include the subsidy in income. The credit rules change by year. Publication 523 points to the instructions for Form 5695 for the details.

What to keep, and for how long

Publication 530 says to keep receipts, canceled checks, and similar evidence for improvements or other additions to basis, and that the records have to be clear and available to the IRS. Publication 523 says that any time you buy real estate you should keep records that document adjusted basis, generally until 3 years after the due date for the tax return for the year in which you sold the home.

Those are different clocks. The general rule for how long to keep a filed return is not the same as the instruction to keep basis records until after you sell. Follow the basis instruction for the remodel file: closing papers, contracts, change orders, invoices, and proof of payment, kept so you can still find them in the year you sell. What else to file at the end of the job is in what to keep after a remodel.

This is general information, not tax advice. Talk to a tax professional about your situation.

Where RenoBinder fits

RenoBinder keeps planned, committed, and paid on each line, plus the change orders that changed the cost. One room is free. A Project Pass ($49 for 12 months) adds receipt forwarding by email and CSV or PDF export, which is the file you would keep with the basis records. Compare plans.

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