29.6 Figuring Adjusted Basis

Adjusted basis in your home is cost basis (29.5) adjusted for items discussed below. Worksheet 29-2 may be used to figure adjusted basis.

Increases to cost basis include: improvements with a useful life of more than one year, special assessments for local improvements, and amounts spent after a casualty to restore damaged property.

Decreases to cost basis include: gain you postponed from the sale of a previous home before May 7, 1997, deductible casualty losses not covered by insurance, insurance payments you received or expect to receive for casualty losses, itemized deductions claimed for general sales taxes on the purchase of a houseboat or a mobile home, payments you received for granting an easement or right-of-way, depreciation allowed or allowable if you used your home for business or rental purposes, any allowable tax credit after 2005 for a home energy improvement (25.21) that increases the basis of the home, residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements added to the basis of your home, adoption credit you claimed for improvements added to the basis of your home, nontaxable payments from an adoption assistance program of your employer that you used for improvements added to the basis of your home, District of Columbia first-time homebuyers credit (allowed after August 4, 1997 to qualifying first-time homebuyers), and an energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.

Planning Reminder

Gains Postponed Under Prior Law Rules

Gain on a previous home sale that you postponed under the prior law rollover rules reduces the basis of your current home if your current home was a qualifying replacement residence for the previous home. Postponed gains on several earlier sales may have to be taken into account under the basis reduction rule. The basis reduction will increase the gain on the sale of your current home.

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Improvements.

Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements to the basis of your property.

Examples of improvements include: bedroom, bathroom, deck, garage, porch, and patio additions, landscaping, paving driveway, walkway, fencing, retaining wall, sprinkler system, swimming pool, storm windows and doors, new roof, wiring upgrades, satellite dish, security system, heating system, central air conditioning, furnace, duct work, central humidifier, filtration system, septic system, water heater, soft water system, built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, attic, walls, and pipes.

Adjusted basis does not include the cost of any improvements that are no longer part of the home.

Record-keeping.

Ordinarily, you must keep records for three years after the due date for filing your return for the tax year in which you sold your home. But you should keep home records as long as they are needed for tax purposes to prove adjusted basis. These include: (1) proof of the home’s purchase price and purchase expenses, (2) receipts and other records for all improvements, additions, and other items that affect the home’s adjusted basis, (3) any worksheets you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, and (4) any Form 2119 that you filed to postpone gain from a home sale before May 7, 1997.