Basis Basics : Rooftop Views

Rooftop Views

Basis Basics

You've heard that word - basis. What is basis and how does it apply to your home? We found this article by Mary Dalrymple on The Motley Fool's site - a site we turn to again and again for financial advice.

My husband and I will be spending this year's holidays ripping out our old 1949 kitchen and replacing it with a modern marvel of efficiency and style. Goodbye, crumbling cabinets -- we've lived with your periwinkle-blue charms long enough.

We'll be doing a big chunk of the work ourselves. And by "we," I mean my husband is a very handy carpenter type, and I am very adept at handing him screwdrivers and hammers. But while I'm not the most mechanical person around, I do tend to be the organizer in the household. That means I've already started accumulating quite a pile of receipts from Home Depot (NYSE: HD), Lowe's (NYSE: LOW), and Sears (Nasdaq: SHLD).

So with my purse filling up with random slips of paper and order forms, I thought it would be a good time to review the basics of basis.

Basis is a concept used by our friends at the IRS to figure out whether you've had a gain or loss on your home. It's whatever it cost you to buy your house. (Stocks follow the same concept, but I'm going to stick with homeownership here.)

With homes, you can increase your basis when you make improvements to the property. Why does this matter? Well, when you go to sell your home, you subtract the basis from the sales price to determine your gain.

A lot of the gain or profit on a home isn't taxed, but if you're in a hot real estate market -- or you plan to live in your house for 25 or 30 years -- keeping track of your basis can make the difference between paying taxes or avoiding them.

Knowing the cost of your improvements can also help you determine your home's market value, or give you some indication about whether that expensive new game room with the bar and disco ball was worth the investment.

What can you add to your basis? You can increase your basis with the cost of improvements that materially add to the value of your home, prolong its life, or adapt it to new uses. You can add your costs for material, expenses, and labor -- but unfortunately, not your own labor.

Eligible projects include, but are by no means limited to: additions, kitchen modernizations, landscaping, driveway pavement, swimming pools, heating and air conditioning improvements, wiring upgrades, storm windows, and even that fancy new game room. (The IRS has a handy chart of examples on page 10 of this publication for first-time homeowners).

What can't be added to your home's basis? Repairs that simply keep your home in its ordinary, efficient operating condition. Painting, fixing plumbing leaks, or replacing broken items doesn't count. However, if they're done as part of an extensive remodeling project, some repairs can be added to a home's basis.

Like many tax goodies, this one comes with a little pain. It's up to homeowners to keep track of the basis themselves. That means hoarding those receipts, and keeping them for as long as you own the property, plus for some time after you sell the home. It's better to organize them now than be searching for that one receipt in a pile of papers 30 years down the road.