Primary Residence Capital Gain Exclusion

lowes home depotWe bought our house during the summer of ’11, before the housing market had rebounded. The plan was to stay for seven to ten years and, hopefully, realize a “buy low, sell high” scenario, without having to pay any taxes. The IRS allows you to exclude up to $500,000 (married – filing jointly) on the sale of your primary residence, something you can do every two years and one day. (I’m wondering if they are ever going to increase the amount above $500K, since it’s been that for years.)

See for details.

Well, who knew how quickly that might happen! We haven’t done much to the house in the four and a half years we’ve lived here, but the property has probably appreciated $400K already. The metro Denver housing market has come back like crazy. So, while this is awesome, I’ve been fretting that we should sell in the next year or so rather than spend money fixing up the house because I don’t want to go over the $500K capital gains exclusion.

First, I think I’m obsessing too much over the tax ramifications. 😉 But, secondly, I just did some research and found out that I didn’t understand exactly how this all works. I didn’t think that improvements made would increase the cost basis, but they do. So, if we spend $25K redoing our driveway and landscaping, we can add that amount to the basis that we use to determine our capital gains. Yee ha! This really makes me excited at the prospect of making some much needed changes.

This also means I need to start keeping track of any qualifying expenses. And I also had to document all the improvements we’ve already made – the swamp cooler, some landscaping, a new chandelier, insulation, and the almost total remodel of the downstairs bathroom. Luckily, this was easy to do and all of it totaled less than $11K. I started a spreadsheet to keep track of this and everything going forward.

Jay has already ripped out the master shower!

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