Which home improvements raise your basis?

Why adjusted basis matters

Basis is the amount of your investment in property for tax purposes. Before you figure gain or loss on a sale, or depreciation, you usually adjust the starting figure, and the result is your adjusted basis. Publication 551 says to keep accurate records of every item that affects basis. A higher adjusted basis lowers the taxable gain on a sale, which is why the line between an improvement and a repair is worth understanding.

What increases basis

The rule in Publication 551 is that you increase basis by all items properly added to a capital account, which includes the cost of improvements with a useful life of more than one year. The publication's Table 1 lists capital improvements such as putting an addition on your home, replacing an entire roof, paving your driveway, installing central air conditioning and rewiring your home. It also lists local assessments for water connections, sidewalks and roads, and legal fees for defending and perfecting title.

Other items it says increase basis are the cost of extending utility service lines to the property, impact fees, legal fees to obtain a decrease in an assessment levied to pay for local improvements, zoning costs and the capitalized value of a redeemable ground rent. Rehabilitation expenses also increase basis, but you subtract any rehabilitation credit you were allowed for them first.

What does not increase basis

Publication 551 states that you do not add to basis costs you can deduct as current expenses. Its example is incidental repairs or maintenance that are deductible as business expenses. The test it applies to casualty repairs is useful for any repair: compare the repaired property to the property before the damage. Spending that substantially prolongs the life of the property, increases its value or adapts it to a different use increases basis; spending that does not otherwise improve the property is a repair and does not affect basis.

The publication also describes costs you can choose to deduct or capitalize, including certain carrying charges such as interest and taxes, and the cost of removing architectural and transportation barriers for people with disabilities and the elderly. If you capitalize them they go into basis; if you deduct them they do not.

What reduces basis

The decreases list is long. For most homeowners the entries that matter are casualty or theft loss deductions and insurance reimbursements, depreciation allowed or allowable (for example after renting part of a home), residential energy credits, the exclusion of utility subsidies for energy conservation, certain vehicle credits, adoption tax benefits claimed on improvements, and easement proceeds. If you claim a residential energy credit for an expense, the publication says the increase in basis from that improvement is reduced by the credit allowed. Depreciation reduces basis by the amount you deducted or could have deducted, even if you never claimed it.

The publication's worked example

In January 2020 you paid $80,000 for real property to use as a factory, plus $2,000 of commissions and $600 of title search and legal fees. You allocate the $82,600 total as $10,325 to land and $72,275 to the building. You spend $20,000 remodeling the building before it is in service. Depreciation allowed for 2020 through 2024 is $14,526. In 2023 you have a $5,000 uninsured casualty loss on the building, which you deduct, and you spend $5,500 to repair the damage and otherwise improve the building.

The adjusted basis of the building on January 1, 2025 is $72,275 plus $20,000 plus $5,500, which is $97,775, minus $14,526 depreciation and $5,000 deducted casualty loss, which is $78,249. To reproduce it, enter 72,275 as the cost, 20,000 and 5,500 as additions, 14,526 as depreciation and 5,000 as the deducted casualty loss.

Keeping a basis file

Keep receipts, contractor invoices, permits and the closing statement together for as long as you own the property. For business or rental property the publication also says to keep separate accounts for additions and improvements, because each is depreciated under the rules that would apply to the underlying property had you placed it in service at the same time. Nothing on this page replaces the home sale exclusion rules, which can remove much or all of the gain on a main home sale; those rules live in a different IRS publication.

Sources

• IRS Publication 551, Basis of Assets (12/2025): Adjusted Basis, Increases to Basis, Deducting vs. Capitalizing Costs, Table 1, Decreases to Basis, Residential Energy Credits, Depreciation, Adjustments to Basis Examples (Example 1). Read November 2, 2026.

Edition read: Publication 551 (12/2025). This page summarizes the publication and does not replace it.