The Standard Deduction Versus Itemized Deductions

• Under tax laws, you are entitled to one of two methods of personal tax deductions: the standard deduction or itemized deductions. You do not have to be a homeowner to choose the standard deduction. In fact, many taxpayers who own homes use itemized deductions because it results in a larger deduction. The IRS allows you to include several different expenses related to your home as itemized deductions. Mortgage interest and property taxes are chief among these. However, the IRS does not recognize the cost of home improvements as a valid personal deduction.
  
  

Cost Basis

• On the other hand, the IRS does recognize that the cost of a home improvement often increases the value of a home. Consequently, when you go to sell your home, it allows you to add the cost of home improvements to what is called the "basis" of your home. This is important because the tax liability on the sale of your home is determined by the sales price, less commission and other sales costs, minus your home's cost basis. A higher cost basis will result in a lower net profit. The lower the profit, the less likely you will have to pay any tax at all or, if you do, then the tax will be reduced because of the home improvement.
  
  

Home Sale Exclusion

• The IRS allows you to exclude $250,000, if you are single, or $500,000, if you are married, from the profit realized from the sale of your home from taxation. Because this exclusion is so large, the cost of any home improvement you might have made may not be relevant to your tax calculations. It only becomes relevant if your profit exceeds $250,000 or $500,000 when not considering the cost of the improvement.
  
  

Recordkeeping

• At the time you make a home improvement you may not know when you will be selling your house, how much it will sell for, or what tax rules will be in effect at the time of the sale. For that reason, it is a good idea to save the financial records associated with your home improvement until you do your taxes after selling your home. If the cost of your home improvement will reduce your tax liability, keep the records as long as they may be needed to prove the deduction was valid, according to the IRS.