- The Washington Times - Friday, April 20, 2001

Phew. The 2000 tax season is finally over. Unless, of course, you filed an extension, which means you have until Aug. 15 to file your tax return.

If you're planning to buy or sell a house before next tax season, now is a good time to take advantage of all the anxiety you just experienced to get prepared for the inevitable. Focus what's left of that nervous energy into getting organized and placing some easily accessible folders in your file cabinet for record-keeping.

Having sold three properties in the past 13 months, I learned quite a bit about what records the Internal Revenue Service requires to claim certain deductions, gains, losses, etc., compared with what records I actually held onto. The silver lining in all the cloudiness about taxes and your home is that the IRS has a great Web site, called the Digital Daily (www.irs.ustreas.gov), which is laden with plenty of useful information. The site is easily navigable and searchable.

To get started, click over to the site and take a look at Publication 552, "Recordkeeping for Individuals" (www.irs.ustreas.gov/prod/forms_pubs/pubs/p552toc.htm). This online publication (also available in print) has sections titled "Why Keep Records," "Kinds of Records to Keep" and "How Long to Keep Records."

Under "Why Keep Records," the importance of the home as a strategic part of tax planning becomes evident when you notice that the IRS advises that one of the reasons to keep records is to "keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made."

With that said, every homeowner should start tracking the basis of his or her home from the day of settlement. Within Publication 523, "Selling Your Home," is a section on determining the basis of your home.

These two sites are worth bookmarking so that you're not looking for them in a panic on April 14, 2002.

On the paper side, put together a folder that includes the records you'll need in the future to determine the basis of your home. Remember: The basis of your home is the cost of acquiring it, whether you pay cash or get a mortgage to pay for the house. For real estate, basis also includes, among other items, recording fees and real estate taxes if you pay the real estate taxes the seller owed on real property you bought and the seller did not reimburse you.

If you purchased a fixer-upper, rehabilitation costs can be added to basis, with certain restrictions. Any other additions to the property that added to its value also may be added to the basis.

To add these to the basis, however, you must keep good records on how much you spent and for what improvements. At the time of the sale of the property, when the homeowner is faced with a huge amount of capital gains, these figures then are added to the basis, which can reduce your tax bill.

When selling property, a single homeowner can exempt $250,000 from the sale of a house from capital gains taxes ($500,000 for married couples) as long as the ownership requirements are made.

For example, a home buyer purchases a fixer-upper for $175,000 and puts $25,000 of rehabilitation into it. The basis is now $200,000. If, in 20 years, the homeowner owns the house outright and the property sells for $325,000, it would appear the homeowner would surpass the $250,000 exemption threshold. However, after reducing the basis of $200,000, the gain is only $125,000, and no tax is due.

For more details on what else is counted as basis, refer to Publication 551, also available at the Digital Daily site (www.irs.ustreas.gov/prod/forms_pubs/pubs/p551toc.htm).

As you can see, hanging on to those settlement papers is just the beginning of saving money when you decide to sell your house.
As with any tax issues, it is always in your best interest to consult with a tax professional.

Mr. Carr has covered the real estate industry for more than 12 years. Comments and questions can be sent by e-mail ([email protected]).

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