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Remodeling costs can save on taxes

Published Oct. 12, 2005

You may not think of your home primarily as a financial investment, but the Internal Revenue Service does. For that reason, every dollar spent on remodeling today could save you money on taxes in the future _ if you keep accurate records of your improvements.

As with any investment, explains Remodeling Ideas magazine, if you make money on your home when you sell, the gain is taxable. You can defer capital gains taxes, however, by buying a home of comparable or greater value within 24 months. In addition, homeowners over 55 qualify for a onetime, one-per-household exemption from taxes on capital gains up to $125,000. If neither of these circumstances apply, you could owe the IRS a chunk of your sales proceeds.

If you've improved your home while you've owned it, however, those upgrades will help offset your capital gains. For example: If you buy a house for $100,000 and sell it for $200,000, you might realize roughly a $100,000 capital gain. If you've made $60,000 of capital improvements along the way, however, your taxable gain would be only $40,000.

"Keeping records is very important," says Roger M. Smedley, a certified financial planner and president of Smedley Financial Services in Salt Lake City. "Everyone gets so excited about refinishing their home, they forget to save receipts." Keep all receipts and paperwork on improvements, and keep them indefinitely, says Smedley.

One caveat: To qualify as a capital improvement, your improvements must add value to your home or prolong its useful life. Repairs and maintenance don't qualify. For example, repainting the exterior of your home is a repair. Putting on vinyl siding is, in most cases, a capital improvement. Check with the IRS if you have a question about which is which.

Make certain your receipt shows the material being replaced and not just the date of purchase.