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For tax advantages: Improve rather than repair

Realestatetaxsecrets_2Why do we elect politicians who pass legislation to benefit the rich? My theory is that we all think we could be rich someday (most of us won’t be!) and we want the laws set in place when we get there.

I mean, isn’t that one of the main advantages of living in the United States, the idea that a person of average means can become wealthy?

And so perhaps that’s why I picked up a copy of Real Estate Tax Secrets of the Rich, a new book by CPA Sandy Botkin. I figured I should know what the rich know about real estate and taxes.

And here’s something I learned: When it’s time to sell my house, I will be taxed on the sales price minus my "basis," (which includes the purchase price and improvements, and maybe some other stuff) and I’ll want my basis as high as possible. According to Botkin, improvements to a house are added to the basis, while repairs are not.

"The main key to whether something is a repair or an improvement," Botkin writes, "is determined by whether it is new or not. New doors would be an improvement, but repairing the door or door handle would be a repair."

The following, he writes, have been held by the courts to be improvements:

• New doors
• New iron grills on windows
• New skylights
• New windows
• New permanent partitions
• New roofs (although some courts have held this to be repairs)
• New floors
• Rewiring

Plus, he writes, I can also include these items that are not necessarily built-in, but which transfer with the house: bookcases, sinks, lighting fixtures, refrigerators, stoves, dishwasher, fire and burglar alarms, cabinets and storage sheds, television antenna and wiring, washers and dryers, and automatic garage doors.

And finally, he said if a repair is part of an overall improvement plan that will add value to the home, and I can prove it was part of a grander plan (maybe tucked inside a home improvement contract), that repair could be added to the basis.

The key to benefiting from the tax secrets of the rich is discussing all these strategies with your tax professional for your particular situation.

And then dahling (channel Katharine Hepburn’s accent here), let’s do get together for a latte when we’re rich!


6 Comments on For tax advantages: Improve rather than repair

  1. How sad that again replacing and buying new is rewarded over repairing and salvaging.

  2. “Why do we elect politicians who pass legislation to benefit the rich?”
    Are there any other kind of politicians?

  3. Thanks for clearing that up, Sheila! Much appreciated!

  4. Kathy,
    you are not quite on point with your last comment. It is exactly the same issue as Rich mentions, as your sales price less your basis is your taxable gain, and of that gain (if you qualify), either $250,000 (single) or $500K (married) is subtracted to determine your net taxable gain, if any.
    Adding to basis mostly matters to rich people because they are likely to gain a lot more than $250K/$500K and/or have multiple homes and/or have investment properties (where the exclusion will not apply). This will not matter as much to the middle class unless they sell after many years and/or at the height of a RE boom, which will not come around again for a while, methinks.
    Here is the calculation:
    Purchase price
    + Purchase costs (title & escrow fees, real estate agent commissions, etc.)
    + Improvements (replacing the roof, new furnace, etc.)
    + Selling costs (title & escrow fees, real estate agent commissions, etc.)
    – Accumulated depreciation (for example, if you ever took the office in the home deduction)
    = Cost Basis
    So, Selling price
    – Cost Basis
    = Gain or Loss
    Then,Gain
    – Exclusion
    = Taxable Gain

  5. Yes, Rich, I believe you are correct about the 250/500 tax exemption for owner-occupied homes. That would be a separate issue from this one. And I believe this author was talking about owner-occupied homes. In fact, I think he mentioned that the rules change for rental properties, and that repairs have great tax advantages in that case. Again, talk to your professional tax person!

  6. Is the authors advice directed toward flips or rental properties ? If I’m not mistaken, profits of up to $250k ($500k if married) are tax exempt provided the home has been owner-occupied for at least 2 years.

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