Will fees I pay for pre-sale home recarpeting reduce my capital gains tax obligation?
New carpets count as a home improvement. which will help reduce your capital gains tax.
I'm getting my house ready to sell, and my real estate agent tells me that no way is anyone going to pay full price given the state of my carpeting. (I have two dogs.) Installing new carpeting is going to cost thousands, however. What's more, because I bought this house over 25 years ago, it has gone up so far in value that my accountant says I'm going to owe capital gains tax. Can I at least reduce my tax bill by the amount I shell out for the new carpets, perhaps as a selling expense?
There is good news and bad news from the IRS on this question.
The good news is that the cost of installing wall-to-wall carpeting to your home is classified as a home improvement for tax purposes. The cost is not deductible, but you can add it to your home's adjusted basis, which will in turn reduce the amount of taxable profit you receive when you sell the home.
Your adjusted basis is the amount you paid for the home plus certain buying expenses plus the amount you spent on home improvements. For example, if your home’s adjusted basis (original cost plus improvemnts you’ve already made) is $200,000 and you spend $10,000 for new carpeting, your adjusted basis is increased to $210,000. You subtract the home’s $210,000 adjusted basis from the amount received from the sale to determine your taxable profit. Thus, installing the carpet reduces your taxable profit when you sell your home by $10,000.
The bad news is that your home’s adjusted basis includes only the cost of permanent improvements. You are not allowed to include in its basis the cost of improvements that have been removed from the home.
This means that if you previously paid to install wall-to-wall carpet, and tear it out to install new carpet, you can’t include the cost of the old carpet in your home's basis. For example, if you installed new carpet 15 years ago for $5,000, you can’t include that cost in your basis, only the cost of the new carpet.