Adjusted Cost basis

General Real Estate Investing
1

  1. Does anyone know a site with good all around tax information on the basics of real estate investments?

  2. My specific question is regarding IRS guidelines for allowable improvements to be added to the cost basis of a property. I believe the general rule is those improvements which are considered to have a year or more expected useful life, but not general repairs. I am told new carpets can be added to the cost basis, I think obviously an addition would be, but how about a bathroom remodel? how about new kitchen cabinets…is there some place with these examples of what is eligible, what is not. I am trying to analyze the tax implications of short term sale vs. hold 1 year for cap gains treatment and the adjusted cost basis is what I am trying to size correctly. THANKS!

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Generally anything that is not a “repair” is a capital improvement. A capital improvement is generally something that increases the value of the improvements (the building).

So for instance, replacing a faulty water heater would not increase the value of the home. This could be considered a repair and can be deducted in the year of expense.

Doing a bathroom remodel however would be considered to improve the building. This would be considered a capital improvement and would be added to the cost basis.

Keep those receipts!!!

The above is not tax advice. Only a competent CPA or tax attorney can advise you on your individual situation. You should seek the advice of a licensed professional for tax advice.

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Thanks…is there some place that anyone knows where these guidelines are outlined, either in an IRS pub or some cost accounting source?

4

carlittle,

Replacing the water heater is not a repair. A repair is fixing something that is broken. If you don’t fix the water heater, but instead replace it, you have made a capital improvement.

Same with the roof. Let’s say the roof leaks. If you fix the roof, you have made a repair. If you replace the roof, you have made a capital improvement.