Cost Basis and Your Taxes

When you sell a house, your adjusted cost basis is subtracted from your sales proceeds to determine your capital gain or loss. Basis starts with what you paid for the house. You can add capital improvements to basis, but not repairs or maintenance. However, if you sold a home before May 7, 1997 and deferred the capital gain by buying up into another home, that gain reduces the cost basis in your existing home.
For your primary residence as a single homeowner you can now exclude $250,000 in capital gains and married couples filing jointly can exclude up to $500,000. Any profit over these limits is taxed at the capital gains rate, which tops out at 15 percent.
According to Internal Revenue Service Publication 523, you can add to basis the cost of “additions and other improvements that have a useful life of more than one year.” So if you’ve added a family room, remodeled bathrooms or kitchens, added hardwood floors, or a deck, these all add to basis. Remember however, if you remodeled a kitchen 10 years ago, then decided to remodel it again today, you can’t add the cost of the first remodel since it doesn’t exist anymore. By the way, painting a house is considered maintenance and can’t be added to basis.
Also, when you sell you can deduct commissions, advertising, legal fees and any loan charges paid by the seller. Expenses to spruce up your home for sale such as painting or landscaping can’t be deducted or added to basis. I suggest you review your basis calculations with your accountant before preparing your taxes.