What Improvements Can Be Added to the Cost Basis of a Home?

When selling a home, the cost basis determines capital gains taxes. This includes the purchase price plus qualifying improvements that reduce taxable profit. Identifying which expenses qualify helps homeowners maximize tax benefits.

Not all home-related expenses count. Some add value and extend a home’s life, while others are routine maintenance. Understanding the difference ensures accurate record-keeping and tax savings.

Distinguishing Capital Enhancements From Repairs

The IRS distinguishes capital improvements from repairs based on whether an expense increases a property’s value, extends its life, or adapts it for a new use. Capital improvements are added to the cost basis, while repairs are routine maintenance and do not qualify.

A capital improvement must provide lasting benefits. Replacing an outdated furnace with an energy-efficient model qualifies; fixing a broken thermostat does not. Upgrading single-pane windows to double-pane is an improvement, but replacing a cracked pane is a repair.

If an expense is part of a larger renovation, it may qualify. A full kitchen remodel—including cabinets, countertops, and appliances—can be added to the cost basis. However, replacing a single broken cabinet door is a repair. The same applies to flooring—installing hardwood throughout the home qualifies, but patching a damaged carpet section does not.

Major Structural Additions

Expanding a home’s footprint or significantly altering its structure increases its cost basis. Adding a new bedroom or home office qualifies because it increases square footage and functionality. Constructing a second story or extending a living space, like a sunroom, also qualifies.

Structural modifications that reinforce the home’s integrity count as well. Replacing a roof with higher-quality materials, such as upgrading from asphalt shingles to metal, extends its lifespan and qualifies as a capital improvement. Strengthening the foundation with support beams or underpinning also qualifies.

Garages and permanent outbuildings contribute to cost basis if built from scratch or substantially upgraded. A detached garage with electrical wiring and climate control becomes a functional extension of the home. Similarly, converting an unfinished basement into a livable space with insulation, drywall, and flooring qualifies.

Landscaping Projects

Outdoor improvements qualify if they provide lasting benefits. Installing a permanent irrigation system improves functionality. Walkways or stone pathways enhance accessibility and curb appeal, making them part of the home’s investment.

Hardscaping elements, such as retaining walls, stone patios, or built-in fire pits, qualify when designed as permanent fixtures. A professionally installed retaining wall prevents soil erosion, contributing to structural stability. Outdoor kitchens with fixed countertops, plumbing, and gas lines also qualify by extending usable living space.

Fencing, whether for privacy, security, or decoration, can be included in the cost basis. A well-constructed wooden or wrought iron fence adds function and character while defining property boundaries. Permanently installed lighting systems along pathways or integrated into landscaping contribute to safety and ambiance, justifying their inclusion as capital improvements.

System Upgrades

Enhancing a home’s core systems increases its cost basis when improvements provide long-term value rather than routine maintenance. Upgrades to HVAC, electrical, and plumbing systems qualify when they improve efficiency, expand capacity, or modernize outdated infrastructure.

HVAC

Replacing or upgrading an HVAC system qualifies when it enhances efficiency. Installing a new central air conditioning unit extends system lifespan and improves energy performance, making it an eligible addition to the cost basis.

Switching from a traditional furnace to a high-efficiency heat pump or geothermal system qualifies, as these systems reduce long-term energy consumption and may qualify for federal tax credits. Expanding ductwork or integrating smart thermostats as part of a broader HVAC overhaul can also be included.

Electrical

Modernizing a home’s electrical system can be added to the cost basis when it increases capacity or improves safety. Upgrading from a 100-amp to a 200-amp service supports modern appliances, making it a qualifying capital improvement. Replacing outdated knob-and-tube wiring with modern wiring enhances safety and longevity.

Installing a backup generator as a permanent fixture qualifies, as it provides long-term resilience against power outages. The same applies to adding new electrical panels or subpanels to accommodate home expansions. However, replacing a single circuit breaker or fixing a faulty outlet is considered a repair.

Plumbing

Significant plumbing upgrades that improve functionality or efficiency can be added to the cost basis. Replacing old galvanized pipes with copper or PEX piping enhances water quality and longevity. Installing a tankless water heater, which provides energy savings and increased efficiency, qualifies.

Expanding plumbing infrastructure to accommodate a new bathroom or kitchen remodel qualifies, as it increases utility and market value. Adding a water filtration system as a permanent fixture or upgrading to a high-efficiency septic system can also be included. However, fixing a leaky faucet or unclogging a drain is considered routine maintenance.

Documenting Expenditures

Thorough records of home improvements ensure qualifying expenses can be added to the cost basis. Without proper documentation, homeowners may struggle to substantiate claims, leading to higher taxable gains. The IRS requires receipts, contracts, and invoices detailing the nature and cost of each project.

Bank statements or credit card records alone may not suffice unless accompanied by itemized descriptions. Homeowners should retain before-and-after photos for major renovations to demonstrate improvements. Permits and inspection reports further validate that work was completed in compliance with local building codes. Keeping records organized for as long as the home is owned—and at least three years after selling—ensures all eligible expenses are accounted for when calculating capital gains tax.