Just bought a new house and there are 3 major projects we are going to do over the next year.
Rebuild 5 fences, 3 of which include gates.
Removing a concrete slab and building a wood deck with a hot tub.
Relandscaping most of the front and back yard.
All told, this will cost us a couple of thousand over the next year so what can I include in the cost basis of the house? Specifically …
The hot tub?
Materials such as wood and concrete?
Flowers, plants and seeds?
Fair market value for my labor?
Which does nothing to help me since it talks about the cost-basis with buying a house - nothing that deals with cost basis after buying or tax considerations with improvements.
You would never include FMV of your labor. You’re only looking at costs. FMV might come up if you’re bartering for items or services, but if it’s just you working, there’s no cost.
Just about anything you do prior to moving in would be part of cost basis. That’s greatly simplified, of course, but the tax law does define cost basis to include the cost of “putting into service” the asset.
Once you’ve moved in, you have to separate things that are repairs (not cost basis) and improvements (part of cots basis). The IRS just issued 250 pages of “clarifications” on this issue and even that has most pros scratching their heads on some items. It’s not always intuitive. For large building projects, people will literally hire a team of engineers and accountants to get together and parse out each component.
But if I was going to give a simplified take on it, ask yourself: 1) Is this becoming a permanent part of the home’s structure/function? 2) If I sell the house 10 years from now, will this increase the sale value? If the answers to either are yes, then it’s probably safe to include it in cost basis, though this is certainly not a precise legal definition.
Just noting that it may well be moot: If this is your residence, you don’t pay any tax on the first 250,000 (or half million if married) of appreciation when you sell the home, anyway.