Years ago, after our kids had left the roost, Kim and I decided it was time to “right size.” We sold the home where we had lived for 20 years.
Like most homeowners, we had done quite a bit to the house. When it came time to sell, I made a reasonable estimate of the significant improvements we had made and included them in calculating our taxable gain.
Not long afterward, I heard from California’s Franchise Tax Board.
My accountant wasn’t particularly surprised. She explained that home improvements are considered “low-hanging fruit” by some tax authorities because many homeowners don’t have the records to support them.
So I created a spreadsheet and entered the costs I could document with invoices, credit card statements, and copies of checks—most of them recent. The total fell considerably short of the estimate on my tax return.
With a big assist from my friendly banker Monica, I was able to get digital copies of checks going back 20 years. It took more than two weeks to sort through them and add the applicable ones to my spreadsheet. Ultimately, I was able to support a bit more than my original estimate.
But what a chore!
When the agent saw my spreadsheet and supporting records, she went no further.
Lesson learned.
Today, I maintain detailed records of improvements to our current home as we make them. It’s considerably easier than reconstructing 20 years of history.
As I researched capital gains taxes further, I learned about something else: stepped-up basis.
Under current federal tax law, the basis of many inherited assets, including a home, can be adjusted to its value when the owner dies. Depending on the circumstances, that can substantially reduce—or even eliminate—the capital gain attributable to appreciation during the owner’s lifetime.
Learning that has shaped the way Kim and I think about our home as we grow older.
Our plan is to continue living here, but if I die first, Kim may decide to right-size, move closer to our grandchildren, or simply begin a different chapter of her life. Understanding how stepped-up basis might apply could make a meaningful financial difference.
Of course, whether to stay or sell shouldn’t be driven by taxes alone. But knowing the tax consequences can be an important part of making an informed decision.
I don’t pretend to be a tax expert. That’s what accountants and estate attorneys are for. But I’ve learned enough to know that good records—and knowing which questions to ask—can help make sure the tax collector doesn’t become an unintended beneficiary.
Working through the Residence task in Legacy Essential Tasks reminded me that getting my affairs in order isn’t only about leaving Kim and my family good records.
It’s also about passing along what I’ve learned so they can make informed decisions when I’m no longer there.
Keep the records now.
Make things easier later.
For the people we love.