Publication 530 - Tax Information For First-Time Homeowners

Part of federal gift tax due to net increase

Improvements include putting a recreation

in value. Figure the part of the federal gift tax

room in your unfinished basement, adding an-

Keeping Records

paid that is due to the net increase in value of the

other bathroom or bedroom, putting up a fence,

home by multiplying the total federal gift tax paid

putting in new plumbing or wiring, installing a

by a fraction. The numerator (top part) of the

Keeping full and accurate records is

new roof, and paving your driveway.

fraction is the net increase in the value of the

vital to properly report your income and

Amount added to basis. The amount you

home, and the denominator (bottom part) is the

expenses, to support your deductions

RECORDS

add to your basis for improvements is your ac-

value of the home for gift tax purposes after

and credits, and to know the basis or adjusted

tual cost. This includes all costs for material and

reduction for any annual exclusion and marital

basis of your home. These records include your

labor, except your own labor, and all expenses

or charitable deduction that applies to the gift.

purchase contract and settlement papers if you

related to the improvement. For example, if you

The net increase in the value of the home is its

bought the property, or other objective evidence

had your lot surveyed to put up a fence, the cost

fair market value minus the adjusted basis of the

if you acquired it by gift, inheritance, or similar

of the survey is a part of the cost of the fence.

donor.

means. You should keep any receipts, canceled

Publication 551 gives more information, in-

You also must add to your basis state and

checks, and similar evidence for improvements

cluding examples, on figuring your basis when

local assessments for improvements such as

or other additions to the basis. In addition, you

you receive property as a gift.

streets and sidewalks if they increase the value

should keep track of any decreases to the basis

of the property. These assessments are dis-

such as those listed in Table 3.

cussed earlier under Real Estate Taxes.

Inheritance

Repairs versus improvements. A repair

How to keep records. How you keep records

Your basis in a home you inherited is generally

keeps your home in an ordinary, efficient operat-

is up to you, but they must be clear and accurate

the fair market value of the home on the date of

ing condition. It does not add to the value of your

and must be available to the IRS.

the decedent’s death or on the alternate valua-

home or prolong its life. Repairs include repaint-

tion date if the personal representative for the

ing your home inside or outside, fixing your gut-

estate chooses to use alternative valuation.

ters or floors, fixing leaks or plastering, and

How long to keep records. You must keep

If an estate tax return was filed, your basis is

replacing broken window panes. You cannot

your records for as long as they are important for

generally the value of the home listed on the

deduct repair costs and generally cannot add

meeting any provision of the federal tax law.

estate tax return.

them to the basis of your home.

Keep records that support an item of income,

If an estate tax return was not filed, your

However, repairs that are done as part of an

a deduction, or a credit appearing on a return

basis is the appraised value of the home at the

extensive remodeling or restoration of your

decedent’s date of death for state inheritance or

until the period of limitations for the return runs

home are considered improvements. You add

transmission taxes. Publication 551 and Publi-

out. (A period of limitations is the period of time

them to the basis of your home.

cation 559, Survivors, Executors, and Adminis-

after which no legal action can be brought.) For

trators, have more information on the basis of

Records to keep. You can use Table 4 (at

assessment of tax you owe, this is generally 3

inherited property.

the end of the publication) as a guide to help you

years from the date you filed the return. For filing

keep track of improvements to your home. Also

a claim for credit or refund, this is generally 3

Adjusted Basis

see Keeping Records, later.

years from the date you filed the original return,

or 2 years from the date you paid the tax, which-

While you own your home, various events may

Energy conservation subsidy. If a public

ever is later. Returns filed before the due date

take place that can change the original basis of

utility gives you (directly or indirectly) a subsidy

are treated as filed on the due date.

your home. These events can increase or de-

for the purchase or installation of an energy

You may need to keep records relating to the

crease your original basis. The result is called

conservation measure for your home, do not

basis of property (discussed earlier) longer than

adjusted basis. See Table 3, earlier, for a list of

include the value of that subsidy in your income.

for the period of limitations. Keep those records

some of the items that can adjust your basis.

You must reduce the basis of your home by that

as long as they are important in figuring the

value.

Improvements. An improvement materially

basis of the original or replacement property.

An energy conservation measure is an in-

adds to the value of your home, considerably

Generally, this means for as long as you own the

stallation or modification primarily designed to

prolongs its useful life, or adapts it to new uses.

property and, after you dispose of it, for the

reduce consumption of electricity or natural gas

You must add the cost of any improvements to

period of limitations that applies to you.

or to improve the management of energy de-

the basis of your home. You cannot deduct

these costs.

mand.

Page 10

Publication 530 (2007)

Publication 530 - Tax Information For First-Time Homeowners - 2007 Page 10

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