Many homeowners don’t bother to keep records of home improvements because they believe the $500,000 capital gain exclusion for married homeowners ($250,000 for singles) will cover any appreciation in their property while they own it. But the historically active market of 2020-22 boosted housing values enough that their home may be worth more than the exclusion will cover when they sell.

There’s a difference between ‘maintenance’ costs and ‘improvements’. Improvements must add value to your home or prolong its useful life. Repairs, like painting or replacing broken windows, are maintenance items, necessary to keep the property in good operating condition, and not recognized by the IRS as additions to the tax basis of your property.

New decks, fences, permanent landscaping and remodeling, on the other hand, are improvements that add value to your property, as are roof replacement, a new furnace or major appliances that extend its useful life. The IRS recognizes these as additions to your property’s tax basis.  You should keep receipts/canceled checks to give to your tax preparer when you sell to determine your home’s tax basis in computing any tax owed. Since banks don’t return canceled checks any longer, it would be prudent to keep the contractor’s invoice or get a paper copy of the canceled check from your bank.

Download Publication 523 at www.IRS.com for more detail about how your home is treated for tax purposes when it sells.