Why improvement records matter
When you sell, your gain is roughly the sale price (minus selling costs) minus your adjusted basis. Your basis starts with what you paid for the home plus certain purchase costs, and it goes up by the cost of capital improvements you make while you own it. A higher basis means a smaller taxable gain.
Many homeowners selling a main home can exclude a large part of the gain: up to $250,000, or $500,000 for most married couples filing jointly, if they meet the ownership and use tests. Records still matter: home values rise, people sell homes that weren't their main residence, and you may not qualify for the full exclusion.
Improvements vs. repairs
An improvement adds value, extends the home's life or adapts it to a new use. A repair keeps the home in its normal condition. Generally only improvements add to basis.
| Usually an improvement | Usually a repair |
|---|---|
| New roof | Patching a leak |
| New HVAC system or water heater | Replacing a capacitor or thermostat |
| Kitchen or bathroom remodel | Fixing a faucet |
| Room addition, deck, patio, fence | Replacing a few broken fence boards |
| New flooring, built-in appliances, insulation | Repainting a room |
| Landscaping, driveway, pool | Routine lawn and pool service |
Repairs done as part of a larger improvement project can count as part of that project. IRS Publication 523 has a fuller list.
What to keep for each improvement
- The final invoice or receipt, showing what was done, by whom, the date and the amount.
- Proof of payment: card statement, canceled check or bank record.
- Contracts and change orders for larger jobs.
- Permits and final inspection sign-offs, which also help when you sell.
- Your own receipts for materials if you did the work yourself. Your own labor doesn't count.
How long to keep the records
Keep improvement records for as long as you own the home, and then for at least as long as the IRS can question the return that reports the sale. That's generally three years after you file it, longer in some cases. In practice: keep them until a few years after you sell.
Rental and home office use
If part of the home is a rental or a home office, the rules on depreciation and what you can deduct each year are different and more involved. Keep the same records and get professional advice.
Common questions
Is a new water heater a capital improvement?
IRS Publication 523 lists a water heater under plumbing improvements, so replacing one generally adds to basis. Fixing an existing one is a repair. Confirm your own situation with a tax professional.
Do I need receipts if I’ll never owe tax on the sale?
You may not know that in advance. Home values change, the exclusion has conditions, and you may rent the home out or move before selling. Keeping the records costs little; recreating them years later is hard.
Can I add the cost of my own labor?
No. Only what you actually paid counts, such as materials and contractors.