It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit — capital gain, in IRS-speak — you’re required to pay taxes on.The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition.

According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement.

Same goes for windows. If you replace a broken window pane, repair. Discount Outdoor Furniture CanberraPut in a new window, capital improvement.Wholesale Wedding Chair Covers For SaleOne exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.Silver Lab Puppies For Sale In MiTo figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the  15% tax rate on capital gains.

Well worth taking an hour a month to organize your home improvement receipts, don’t you think?Related: Tax and Home Records Checklist: What to Keep and For How LongThe top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice. .Finally, home-renovation payback is going in the right direction: yours.During the housing boom, it was tough to get a contractor to take your call, much less accept the job and charge a fair price. Nothing like a massive housing bust to turn that momentum around. Now that a few trillion dollars in real estate equity have been obliterated, there's a new sheriff in town: you.

Contractors are panting for work and prices have dropped for their materials and labor. For anyone who can afford it, this is a great time to take on small and medium-size projects to make your home more livable. After all, you probably don't want to sell anytime soon, so you might as well take steps to boost your enjoyment while you're there and make it more attractive to buyers when you're ready to sell.It worked for Christian and Mary Ann Lavoie of Shoreham, N.Y. When appliances in their deteriorating kitchen started breaking down last winter, they were delighted to find contractors and suppliers willing to bargain to keep costs down. "We didn't want to go overboard," says Christian. "The contractors were very open to talking price, and there was no pushback on the budget." The Lavoies had their cabinetmaker search his sources for European-made pullout drawers and pantry units, and got the upgrades nearly at cost. They also tweaked the kitchen layout to accommodate less expensive versions of Jenn-Air appliances, such as a $2,800 double oven instead of a $5,000 version.

When it comes to home renovations, the key today is choosing projects that pack potential payoffs: bringing your house up to date or lowering energy bills for you and the next owner. Major renovations won't pay you back the way they used to, according to Remodeling magazine's 2008-09 Cost vs. Value Report (the '09-'10 version comes out in November). Adding a bathroom or family room, for example, might return just two-thirds of its cost when you sell. But the following changes can make your house more livable for your family, and boost its value when it's time to sell. 1. FloorsReplacing dated, scuffed floors can give your house a new sheen and make small spaces seem larger. Figure on a payback as high as 75 percent. If you'll do this job yourself, prepare for one long weekend of pain, says Jerry Jurewicz, vice president of operations of Home Owners Bargain Outlet, an Illinois chain of discount building-materials retailers. Once you've cleared out the furniture, you'll need to pry off the bottom molding, rip out the old flooring and install the new stuff.

Genuine hardwood flooring costs about $2.50 to $3 a square foot, and another $3 a square foot for a pro to install it. That's about $1,100 for a 12- by 15-foot living room. Add a couple hundred dollars for the underlying subfloor and the cost of pizza to bribe the neighbor's kids to help move the furniture, and you might pull it off for about $1,500. If your hardwood floors are just scuffed, or you'd like a different stain, professional refinishing costs about $2 a square foot. Total: about $400 to $500 for that same space. Do-it-yourselfers might consider installing a "floating floor" of wood or laminate. Unlike hardwood flooring, you don't have to nail it down: After you put down a thin liner, the pieces snap together. Laminate is the toughest-wearing flooring, so it's ideal for playrooms and kitchens. It costs $1.25 to $2 a square foot at big-box retailers.If you'd rather put in tile, ceramic goes for as little as 50 cents a square foot. With patience and the right rental tools, you can install it yourself.

Don't bother with vinyl tile, says Jurewicz. It costs about the same as ceramic, wears poorly, and looks dated.2. KitchenInstead of spending a bundle gutting this essential room, think smaller. Counters, sinks, plumbing and lighting fixtures and appliances can change their look and cost far less than a major re-do. From an investment standpoint, the kitchen may be the best place to sink your money: Kitchen facelifts pay back about 80 percent of their cost.Granite is the standard high-end finish for kitchen counters, but high-end synthetic stone materials look just as good, wear better, and cost about the same. Installing a granite or solid-surface counter, along with a stainless-steel sink and faucet, will probably run $5,000 to $8,000.Your contractor might suggest that, while you're replacing the counter, get a new backsplash, too. Backsplashes don't get the wear and tear counters do and can add $2,000 or more to the cost of your modest upgrade.3. BathroomsYou can expect to recapture about 75 percent of the cost of a minor bathroom remodel.

Most bathtubs already have showers built in, so the plumbing infrastructure is likely there. Replace a dated, little-used tub with a spacious shower and multiple showerheads. When you're ready to sell, "a big shower counts as a full bath," says Barry Goggin, president of Barry Goggin Construction, a Long Island contractor. Similarly, adding a decent-sized shower to a half-bath makes it a whole bath - and much more marketable. You can get a big "rainfall" showerhead for about $200, or spring for a fancier handheld and other gadgets for $500 and up. Don't bother building a niche into the shower wall to hold shampoo bottles and such (typical cost: about $300). 4. ClosetsFew things make a home more unlivable than chintzy closet space. And roomy, organized closets are a big draw for prospective buyers, though it's impossible to put an exact payback percentage on them. Fitting a walk-in master closet with drawers, shelves, shoe racks, hooks and poles can cost $500 to $2,500 or more, depending on the quality of the materials and the complexity of the design.

Wood is the most expensive material, but typically delivers the best return on investment.This is a job where it's easy to overspend. So decide exactly what you want and need before you either buy the supplies or bring in a professional closet organizer, who will charge $50 to $150 an hour. Make sure you square reality with the many options: Will you really sort your socks into separate drawer dividers?5. Energy UpgradesLast year, Amy and Dave Stanislawski spent $4,000 to install solar heating panels in their Brookfield, Wis., house. Sun-warmed radiant heat kept their floors warm even in the frigid Wisconsin winter, and their monthly utility bills dropped by half. The couple figures it will take about five years to recoup the cost of the solar system, which was partly paid for by federal energy conservation tax credits. Real estate agents say energy-saving amenities make a house more attractive to buyers. New windows, for example, return 77 percent of the project cost, according to Remodeling's Cost vs. Value Report.

But there's another good reason to upgrade now: Like the Stanislawskis, you can let Uncle Sam help shoulder the cost of projects to make your house more energy efficient and more attractive to prospective buyers.You can claim federal tax credits equal to up to 30 percent of the cost of certain home improvements completed by Dec. 31, 2010. Projects include: upgrades to insulation, windows, doors, skylights, central air conditioning, heat pumps, furnaces and water heaters. There's no dollar limit for the 30 percent credits to put in a solar water heater or solar panels, although the payback may take longer. Later this fall, state governments will offer $50 to $250 rebates for upgrading to Energy Star-qualified appliances, including refrigerators, washing machines and dishwashers.You may need to wait years to recoup some energy conservation moves. So if you're more worried about money than your carbon footprint, run the numbers to ensure you'll be there by the time the cost gets covered. When you're ready to sell, spell out your energy improvements for prospective buyers.

Create a worksheet showing what you spent, plus the before-and-after utility bills. If you're not sure where to start, get an energy audit; local utilities often offer them for free or nearly so. The floor-to-roof energy X-ray will diagnose the most expensive problems and determine the most cost-effective upgrades.Replacing floor and wall insulation usually delivers the fastest payback for the lowest price. Putting in new attic insulation (it breaks down after a couple of decades) can pay for itself in just a year. Blowing in insulation in a previously uninsulated area will pay for itself in about six years, says Matthew Leonard, a vice president with PEA Builders, a Muskego, Wis., contractor specializing in energy-saving projects. One caveat: Don't just toss new insulation on top of old. You'll have to remove or work around existing vapor barriers before layering on new insulation. The Department of Energy Web site has a helpful formula to let you pencil out the payback for insulating your home.