Home Improvements That Can Reduce Taxes When You Sell Your Home

Selling your home can bring up an important tax question:

Which home expenses actually help reduce taxable gain?

A lot of homeowners assume they should keep every receipt, but not every expense counts the same way. Some costs may increase your home’s tax basis, and some selling costs may reduce your gain. Others, like routine repairs and maintenance, usually do not help. According to IRS Publication 523, the key difference is whether the cost added value, extended the life of the home, adapted it to a new use, or was a direct cost of buying or selling the property. 

If you’re planning to sell, here’s a simple way to think about it.

Why this matters

When the IRS calculates gain on the sale of a home, it looks at your selling price, subtracts selling expenses, and compares that to your adjusted basis. Your adjusted basis generally starts with what you paid for the home and then gets adjusted over time. A higher basis can mean a lower taxable gain. 

For many homeowners, some or all of the gain may already be excluded. In general, the IRS says you may be able to exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly, assuming you meet the ownership, use, and timing rules. 

Even so, good records still matter. Your gain could exceed the exclusion, you may only qualify for a partial exclusion, or your situation may be more complicated because of rental use, a home office, inheritance, or divorce. 

Home improvements that may increase your basis

In plain English, these are usually the bigger-ticket items that improved the property in a meaningful way.

IRS Publication 523 gives examples such as:

• room additions like a bedroom, bathroom, garage, deck, patio, or porch,

• landscaping, driveway, walkway, fence, retaining wall, or swimming pool,

• major systems like a heating system, central air, furnace, ductwork, wiring, plumbing, septic system, water heater, or filtration system,

• exterior upgrades like a new roof, siding, storm windows or doors, and insulation,

• interior upgrades like built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, and a fireplace. 

This is why homeowners should keep records for major remodels, system replacements, and substantial upgrades.

Certain purchase costs may count too

Some closing costs from when you bought the home may also be added to basis.

The IRS lists examples including:

• abstract fees,

• utility installation charges,

• legal fees related to the purchase,

• recording fees,

• survey fees,

• transfer or stamp taxes,

• and owner’s title insurance. 

If you still have your old settlement statement, it is worth pulling it out before the sale.

Selling costs can help reduce gain

Some costs do not increase basis, but they may still reduce your taxable gain because they count as selling expenses.

Examples include:

• real estate commissions,

• advertising fees,

• legal fees,

• certain buyer costs paid by the seller,

• and other direct costs of selling the home. 

That is one reason your final closing disclosure matters just as much as your original one.

What usually does not count

This is where many homeowners overestimate what helps.

The IRS says routine repairs and maintenance generally do not increase basis. That includes things like:

• painting,

• fixing leaks,

• filling cracks or holes,

• and replacing broken hardware. 

The IRS also says certain financing-related costs usually do not count toward basis, including:

• mortgage insurance premiums,

• loan assumption fees,

• appraisal fees required by a lender,

• credit report fees,

• points or loan origination fees,

• and refinancing costs. 

So while those costs may have been real, they usually do not help reduce gain when you sell.

When repairs may count after all

There is an important exception.

If repair-type work was done as part of a much larger remodeling or restoration project, it may be treated as part of the improvement. The IRS gives the example that replacing broken windowpanes is normally a repair, but replacing windows as part of a larger whole-home project can count as an improvement. 

Context matters.

Watch out for items that can reduce basis

Not every tax-related housing item helps your number. Some things can actually reduce basis instead.

Publication 523 lists examples such as:

• depreciation claimed or allowed for business or rental use,

• casualty losses claimed,

• insurance reimbursements,

• energy credits or subsidies connected to improvements,

• certain seller-paid points,

• and some canceled or forgiven mortgage debt excluded from income. 

This is one reason a home sale can get more complicated than people expect.

Keep these records before you sell

Before selling your home, it helps to gather:

• your original purchase closing statement,

• receipts for major improvements,

• contractor invoices,

• permits,

• proof of payment,

• and your final sale closing statement. 

A little organization up front can make tax prep much easier later.

Bottom line

If you are selling your home, the most valuable records are usually the ones tied to:

• major improvements,

• eligible purchase closing costs,

• and direct selling expenses. 

Routine repairs usually do not count. Bigger improvements often do. And if you used part of the home for business or rental, the rules may be more complicated. 

If you are not sure what to keep, start with this rule of thumb:

Keep documents for anything that added value, extended the life of the home, or was a direct cost of buying or selling it.

This article is for general educational purposes and should not be treated as tax advice. Tax rules can be more complex for inherited property, rental use, business use, depreciation, or partial exclusion situations.