They Kept Every Receipt From the Kitchen, the Roof and the Deck. When They Sell the House Next Spring, a Large Share of the Gain Will Never Be Gain at All

If you own a home, contractor bills for the kitchen, roof, and deck add real value when you sell. Every dollar spent on a qualifying home improvement raises your cost basis, cutting the taxable capital gain dollar for dollar.

How Basis Quietly Shrinks Your Taxable Gain

Your basis is your tax investment in the house, starting with the price you paid. Your gain is the sale price minus selling expenses minus your basis. Raise your basis, and your gain drops dollar for dollar, according to IRS Publication 523, revised February 26, 2026.

The legal authority is Internal Revenue Code section 1016(a)(1), which requires basis adjustments for expenditures “properly chargeable to capital account.” In plain English, that means money spent on upgrades that last.

Why a 1997 Cap Makes This Urgent

Section 121 lets you exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if you owned and lived in the home for at least 2 years during the 5-year period before the sale. Congress set those caps in 1997 without indexing them to inflation. Couples who bought decades ago in fast-appreciating markets can exceed $500,000 of gain, leaving basis as the only remaining tool.

Improvement or Repair: The Line That Decides Everything

Publication 523 says improvements “add to the value of your home, prolong its useful life, or adapt it to new uses.” A repair “keeps your home in an ordinary, efficient operating condition.” Only improvements add to basis. Examples: a new roof counts, fixing leaks doesn’t; a bedroom addition counts, repainting doesn’t; replacing all windows counts, replacing one pane doesn’t.

Qualifying improvements include decks, patios, landscaping, driveways, fences, heating and air systems, wiring, siding, insulation, water heaters, septic systems, built-in appliances, kitchen modernization, flooring and storm windows. Repair work done as part of an extensive remodel counts as an improvement.

Closing Costs Help You at Both Ends

Purchase fees that become basis include recording, survey, legal, transfer, and title insurance. Loan-related charges such as points and appraisal fees do not. When you sell, commissions, advertising, and legal fees reduce the sale price, lowering your gain the same way a higher basis does.

Rules That Pull Basis Back Down

• If you replace an improvement, its cost leaves your basis. Only the kitchen still in the house counts if you remodeled twice.
• Casualty losses you deducted and insurance payments reduce basis.
• Energy credits reduce basis. The One Big Beautiful Bill Act ended both residential clean energy credits for expenditures after 2025, but the Energy Efficient Home Improvement Credit remains available through 2032.
• Depreciation from a home office or rental period reduces basis. Gain equal to depreciation allowed after May 6, 1997 is taxed as unrecaptured section 1250 gain.

No Receipts? You Can Still Rebuild the File

Publication 530 requires you to keep receipts, canceled checks, and similar evidence. Your records “must be clear and accurate and must be available to the IRS.” If paperwork is gone, you can rebuild it:

1. Ask contractors for copies of bills.
2. Pull bank and credit card statements and canceled checks.
3. Collect dated before-and-after photos.
4. Request building permit records from your county or city.
5. Log each project, including its type, date, and amount, on Publication 530’s “Record of Home Improvements” worksheet.

Rebuilt records count for less than original receipts, so try to back up each project with several independent sources.

Start the Folder Before Next Spring

File every bill from now on, as Publication 530 requires keeping basis records for as long as you own the home, plus 3 years after you sell. Call your county building department for the permit history on your address to show which projects were recorded and when.

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