Keep Receipts for Improvements
Sooner or later, you will spend money on your home. Some of what you spend money for should be tracked and documented for tax purposes in order to minimize the capital gain that you may owe tax on in the future. Capital gain simply means the difference between what you receive for the house when you sell it less what it cost you to buy the house -- with one important modification. The IRS allows you to add the cost of improvements to the original cost of your home in order to calculate what's known as your adjusted-cost basis.
Capital Gain = Net Sale Price - (Purchase Price + Capital Improvements)
For example, if you buy your home for $150,000 and, over the years, it appreciates so that (after paying the costs of selling) your net selling price is $200,000, your capital gain is $50,000. Remember, though, that the IRS allows you to add the value of the capital improvements that you make to your home to your purchase price.
A capital improvement is defined as money you spend on your home that permanently increases its value and useful life -- putting a new roof on your house, for example, rather than just patching the existing roof. So if you made $10,000 worth of improvements on the home you bought for $150,000, your capital gain would be reduced to $40,000. Money spent on maintenance, such as fixing a leaky pipe or replacing broken windows, is not added to your cost basis.
Before you sell your home, please be sure to understand the tax consequences of such a transaction. Many homeowners are eligible to shelter a large chunk of their home's capital gain from taxation when the time comes for them to sell.