Long-standing rules authorize valuable tax breaks for homeowners who itemize their deductions on Form 1040’s Schedule A. They’re able to claim annual write-offs for payments of mortgage interest and property taxes.
I noted in previous columns some of the changes introduced by the Tax Cuts and Jobs Act that Congress passed in December of 2017. Among other things, Congress decided to curtail deductions for mortgage interest and property taxes. Those restrictions apply to returns filed for calendar years 2018 through 2025.
Our legislators made no changes to the rules that prohibit current deductions by homeowners for money spent on improvements that add to the value of their homes, prolong their useful lives, or adapt them to new uses. Those rules require them to add the money to their home’s cost basis—the figure used to determine gains or losses when they sell their homes.
Consequently, improvements decrease any taxable gains on eventual sales. In other previous columns, I’ve cited Internal Revenue Code Section 121. It relieves home sellers of taxes on most of their gains when they dispose of their main homes.
Congress didn’t alter the exclusion amounts. Section 121 continues to cap the exclusions at $250,000 for single persons or married persons filing separate returns and $500,000 for married couples filing joint returns. So sellers with gains greater than $250,000 or $500,000 are liable for taxes on the excess.
No longer does the law allow sellers to postpone taxes on their entire gain by buying another home that costs more than what they received for the one sold. The postponement break ended in 1997.
In the event the IRS questions how a seller determined gains, the audit will be less traumatic and less expensive if your client kept meticulous records that track the dwelling’s basis.
Those records should include what the owner originally paid for their dwelling, plus certain settlement or closing costs, such as title insurance and legal fees. They should also include what the owner subsequently shells out for improvements.
Qualifying improvements run the gamut from big projects, such as adding rooms or paving driveways, to small jobs, such as installing towel racks or medicine cabinets. Home owners can’t count routine repairs or maintenance that add nothing to the place’s value, such as painting or papering rooms or replacing broken windowpanes.
Bundle Ordinary Repairs into a Bigger Job
It might pay for your clients to postpone repair projects until they can do them in connection with an extensive remodeling or restoration project. Adding the smaller job into bigger jobs may allow them to include some items that would otherwise be considered repairs, such as the cost of painting rooms.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.