Replies to post #96 on Tax Questions

[gdb81]

Home improvement costs can be added to the basis dollar for dollar. I tried to find a link that explains it clearly and simply, and wasn't able to. But here is a start, somewhere in there they link to the official IRS wording:

http://www.bankrate.com/brm/news/mortgages/20040220a1.asp

If you don't feel like wading through tax code jargon and nonsense the basic rules for home improvement are:

You can add home improvement costs to the basis of your house provided they extend the life of the house or substantially improve it. The amount added is your actual cost, including materials and labor but excepting your own labor (sorry, blood and sweat doesn't count in the eyes of the IRS)

Beyond your own labor, the other thing that you can't attach to your cost basis are repairs and maintenence: for example, if you repave the driveway because of wear and tear that is considered maintenence, if you pave a dirt road or a stone driveway that is considered improvement. The difference between the two is a bit tricky, but air on the conservative side if you can't figure out which is which. The main rule to consider is: does this change my house in a noticeable way.

Based on the examples you gave, remodeling counts as home improvement as long as it's more than just new wallpaper. Adding a detached shop is a definite home improvement, as are the driveway to the shop and the retaining wall. The landscaping can fall in either catagory depending on the type.

In general, you will need receipts to back up your claims, though if you don't have them there are a few options. One is if you have before and after pictures of the work done, in which case you can estimate the value of that work (but always make the estimate as low as possible to avoid any red flags)

The general rule of thumb is that anything you add won't be questioned, unless you try to get greedy. That's when problems arise.

[nitetrak]

I reasonable amount can be deducted as contract labor...Cash payments to contracted friends, relatives, a neighbor etc.
Don't forget all those labor receipts that were misplaced to various subcontractors.
Many contractors work cheaper for payment in Greenbacks. They will scribble a receipt which is meaningless on their end. All it takes is a letter head.
Costs of DIY improvements could run as high as 80% of contracted work and as cheap as 50% on most jobs requiring both material and labor.
Reasoning: You pay more on retail costs for your material, and you put in more hours due to non professional labor.

When I built I was fortunate enough to find a young plumber/entrepreneur who was trying to establish credit with suppliers. Credit with his suppliers was established through initial cash orders first and then from there he was given...30days...60days...credit. He told me buy what you want thru my business and pay cash upfront at my contractors prices. My furnace, bath, and kitchen fixtures/appliances were purchased and he established 30 day credit needed for his new company. It was a win/win for both of us.
nitetrak