How improvements add to a home’s basis

Tell your homebuyers and current homeowners to keep records of the improvements they do on the house, said tax expert Sandy Botkin.

These improvements add to the home’s basis, which is what was paid for the home, or its’ market value if it was inherited, said Botkin, the tax director of Taxbot, a PAR partner. Botkin is the author of several books about taxes, including Real Estate Tax Secrets of the Rich.

“What many people fail to realize,” said Botkin, “is that a lot of things increase basis when you’re in the home. If you put in new plants or shrubs 20 feet from the home, it’s added to basis. And any improvements you make, such as a new roof or a new hot water heater, are added to the basis. If you’re selling your home, anything that transfers to buyers, such as a washer and dryer, is a part of the basis.”

However, Botkin cautioned about the difference between improvements and “fixer-uppers.”

“If you paint your home, or fix a hole in the wall, that does not add to the basis,” he said. “Improvements are more important than a repair for principal residences and second homes, because repairs give you no benefit, no deduction and no addition to basis. However, if you own investment properties, repairs are much better because you can deduct them.”

“Improvement is something new, it improves the value of the home, such as replacing a whole ceiling, instead of just a part. An improvement is much more important than a repair,” he added.

Botkin also advised those who are renting that buying is generally more affordable, even if it doesn’t seem so at first glance. “Usually, the cost of the mortgage is probably a couple of hundreds of dollars more per month than they pay for rent. What they don’t understand is that it will probably be cheaper because mortgage insurance, interest and the property taxes are tax-deductible. This is something people need to understand. It’s usually cheaper to buy then rent,” he said.

“Everything is cheaper if you get a deduction, cha, cha, cha,” added Botkin.