The Single Most Over Looked Tax Write-Off When Selling A Investment Property
Yes, it is true that most people overlook this tax write-off when selling a property. The tax basis of your real estate establishes the point from which a gain is obtained in the event of a sale. This point is the secret as to why this is the most commonly overlooked deduction. Most people are reluctant to keep an accurate account of increases to their tax basis for any property that they own. One reason for this is the fact that there is no immediate deduction at the time of the expenditure, so the record may be nothing more than a bill and the corresponding check that satisfied the account. All of that was filed away, then after a while (three or more years later) was thrown out to make room for new years of tax data and records.
Twenty years or more of improvements to a property can add up to substantial sums of investment in the property you own. All of these qualified expenditures will increase your tax basis by the same amount and, in turn, will reduce the capital gain you have at the time of sale.
The items that add to your basis are many and include obvious capital expenditures for items such as a swimming pool, awnings around the pool, a dock on the lakefront part of the property, and so on. These things are obvious and can be recorded and then placed in a separate and permanent file that you keep until you sell, exchange, or otherwise dispose of the property. However, other expenditures should end up in that file as well. I am talking about some expenditures that are less obvious, i.e., fees to the designer who drew the plans for the pool and the gardner who removed plants and lawn to make way for the pool. Each of these costs is related to capital improvement.
It would be wise to ask the person who prepares your income tax, on an annual basis, for a current list of qualified capital expenditures that will increase your basis. If you do it yourself, ask the IRS to give you a guide on these allowable items. The following form should be completed at the end of each year. When you have completed this form, keep a copy with this year’s tax data, plus put a copy in a file that is just for this form. Label the file “Annual Tax Basis Adjustment For” and keep it where it will not be put in a storage box and locked away (or thrown out after a few years).
The IRS provides a chart on page 8 of its Publication 523, Selling Your Home. The list includes:
- Additions such as a bedroom, bathroom, deck, garage, porch or patio
- Heating and air conditioning (for example, putting in new systems)
- Plumbing (for example, installing a new soft water system)
- Interior improvements, such as built-in appliances and wall-to-wall carpeting
- Insulation additions to the attic, walls, floor, pipes or duct work
The IRS even includes such miscellaneous items as a central vacuum, wiring upgrades or a satellite dish. So enjoy your DishNetwork channels now and when you sell.
Another common and often-overlooked improvement, is landscaping. Paving your driveway, erecting a fence or even putting in a retaining wall can all add value to your home, boost its basis and reduce any capital gain when selling.
Also don’t forget those myriad costs associated with your house purchase. Land survey costs, attorney fees and your broker’s commission all add to the value or basis of your home.
To Download a copy of the Annual Cost Basis Form to track your cost basis annually and a copy of IRS Publication 523 – Selling Your Home. Click On The Download Icon.
Leon C. Williams
LUCA Financial Services
Williams Landmark Real Estate