“Basis” refers to money you have invested in your home and have not received a tax deduction for. The biggest component of your home’s basis is the original purchase price. To calculate “basis” you generally start with the amount you paid for the home when you purchased it or the amount you paid to have it built; then you start adding. The rest of the additions to your home’s basis are home improvements. An improvement must accomplish one of the following three goals:
- Materially add to the value of your home;
- Considerably prolong its useful life; or
- Adapt it to new uses.
The distinction between an improvement and a repair isn’t always clear. Your basis will be used to calculate any gain on your home upon a sale in the future and keeping accurate records of these items while you own the home is very important.