When you finally sell the house, you can reduce your capital gains taxes to their lowest legal limit by increasing your tax basis. Your tax basis is the purchase price of your house, plus certain acquisition costs paid at closing, plus capital improvements made over the years of home ownership. The higher your basis, the lower your capital gain and potential tax will be. Note that capital improvements are not the same as repairs or maintenance, such as painting walls or fixing broken window panes. A capital improvement must add to a property s value, prolong its life, or adapt it to a new use.
Repairs merely maintain a house in an acceptable condition.
Each time you sell a house, you must complete IRS form 2119, Sale or Exchange of Principal Residence. This form asks questions such as how much you paid for your house and how much you sold it for. Always keep a copy of these forms because you will need to refer back to them for future house purchases and ales. One house sale affects the cost basis for the next house, and you need to keep track of how much profit you are deferring. You may wish to ask a professional tax preparer for help.