We want to thank our friends at BHB Advisors for sharing the following article on basis…
What is basis and why is it so important to me? Simply put, basis is typically what you initially purchased your home for plus any improvements. Currently the law allows an individual to exclude up to $250,000 of gain ($500,000 for married couples) from the sale of their primary residence. Basis in the primary residence is needed to determine the overall gain (or loss) on the sale of the primary residence. If there is a gain and they qualify for the exclusion any amount of gain above the exclusion is taxable income. With the decline in the real estate market many homes are selling for less than $500,000 and even fewer at a gain, therefore it is easy to think it is unimportant to keep track of the basis. But history has shown that values of homes kept for 15 or even 30 years can easily appreciate five to ten times in value. This is even more reason to keep track of basis since in 15 or 30 years from now the appreciation on a $200,000 house could easily be worth $1,000,000 or more. By keeping track of the basis you could reduce or even eliminate the income tax when you eventually sell your home.
Be sure to keep accurate records and receipts to prove the amount of the basis in your home starting with the settlement statement from your purchase (including closing costs and other expenses to purchase the property). Add to this any later expenses that add to your basis such as a room addition, finishing your basement, landscaping, new roof or windows, etc. To be considered additional basis the amounts paid need to add value or extend the life of the property. Expenses to maintain a house are not considered in the basis of the property. These would include painting, repairing a leaking pipe, or repairing a damaged floor. Keep the receipts together with your initial purchase.
The bottom line is that taking the time to save your receipts for any improvements could save you income taxes in the future.