STOP! Don’t throw that receipt from the service person who just left or from the home improvement store! There are valid reasons to keep them, from tax reasons to a record of what home improvement was done.
Home improvement records
One reason is to have a record of what you have done to improve your home. Why is that important? Well, let’s say your elderly parent installed new flooring. Looks great, but you don’t know what was installed. 10 years down the line, your parent is no longer with us and you are selling the home. The realtor or future buyers will want to know what was installed. Good record keeping will mean you know what to tell them. Sure, it’s morbid, but it makes the point. Down the road, will you remember the kind of wiring used when your home entertainment system was installed, or the color of paint on the wall.
Another reason is taxes
When you bought your home it was worth the amount you paid for it. As you make improvements to it the value increases. When you sell your home, you may have to pay taxes on any increase in value on the home, called capital gains. To figure out if there is a gain or loss you subtract the current value from the amount you paid for it. That loss or gain is called the basis.
So how do you know the basis?
That basis is important. For example, if your home has a $500,000 basis and you sell it for $750,000, you have realized a $250,000 gain. For most taxpayers, that gain on your first home sale is tax free. But if your gain is over that, or if you’ve had a gain before that you got “free” of taxes, then you’ll be responsible for the money you made on the sale. Proving it is the important thing. Knowing what you paid for improvements will lower that gain.
So keep good records. The tax man might not thank you, but your bank account will.