I have used many of my previous columns to help accountants and other tax professionals alert their clients to perfectly legal, easy-to-understand strategies that save taxes. Im going to devote this column and two subsequent ones to the selection and implementation of strategies that help homeowners.

Long-standing rules authorize valuable tax breaks for owners who itemize their deductions on Form 1040s Schedule A. Theyre able to claim annual write-offs, within limits, for payments of mortgage interest and property taxes.

Owners cant claim current deductions for money spent improvements that add to the value of their homes, prolong their useful lives, or adapt them to new uses. The law requires them to add the money to their homes cost basisthe figure used to determine gains or losses when they sell their homes. Consequently, improvements decrease any taxable gains on eventual sales.

Big breaks for sellers with big profits:The law permits sellers to exclude, meaning they escape, federal and state income taxes on sizable portions of their profits from sales of their principal residences.

The profit exclusions are as much as $500,000 for married couples filing joint returns. They drop to $250,000 for single persons or married couples filing separate returns.

How do things work out when sellers reap gains greater than $500,000 or $250,000? Theyre liable for taxes on the excess.

IRS audits (or examinations, as the agency prefers to call them):In the event the IRS questions how seller Sarah determined her gain, the audit will be less traumatic and less expensive if she has kept meticulous records that track the dwellings basis.

Those records should include what she originally paid for her home, plus certain settlement or closing costs, such as title insurance and legal fees. They should also include what she subsequently shells out for improvements, as opposed to repairs.

Improvements, both big and small, boost basis:Qualifying improvements can be big projects, as when Sarah puts a recreation room in her unfinished basement, adds another bedroom or bathroom, puts up a fence, or paves her driveway. Or they can be small projects, as when she upgrades closets, or installs built-in bookcases, new faucets, towel racks, or medicine cabinets.

Repairs dont boost basis:An adamant IRS insists that Sarah cant count routine repairs or maintenance that add nothing to the places value. They just maintain it. Some examples: Sarah repaints her home inside or outside, fixes her gutters or floors, repairs leaks or plastering, and replaces broken window panes.

Bundle ordinary repairs into bigger jobs:It might pay for Sarah to postpone repair projects until she can do them in connection with an extensive remodeling or restoration project. Adding the smaller job into bigger jobs may allow Sarah to include some items that would otherwise be considered repairs, such as the cost of painting rooms.

In two subsequent columns, Ill discuss more strategies to impart to your home-owning clients.

Additionalarticles.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 thearchive of my articles(more than 350 and counting).

More here:
Why It Pays to Keep Track of Home Improvements - Accountingweb.com

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May 27, 2020 at 2:47 pm by Mr HomeBuilder
Category: Bathroom Remodeling