What Improvements Are Allowed for Capital Gains Tax: Basis Rules

For capital gains tax purposes, the improvements you can add to your home’s basis are the ones that add value, extend the home’s useful life, or adapt it to a new use. The IRS treats those costs as capital expenditures that raise your basis, which shrinks the taxable profit when you sell.¹ Routine repairs and upkeep don’t qualify. The distinction sounds simple, and the categories below are broad, but the line between the two is where most homeowners lose money they were entitled to keep.

The Rule That Decides Everything: Improvement vs. Repair

An improvement adds to your home’s value, makes it last longer, or changes how you use it. A repair keeps something running the way it already was. Only improvements adjust your basis.¹ The underlying tax code authorizes a basis adjustment for any expenditure properly chargeable to your capital account.²

The other test worth carrying with you is permanence. A portable window air conditioner you take with you when you move is not an improvement. A central air system tied into the ductwork is. When you’re unsure whether a project qualifies, ask whether it lasts and whether it stays with the house.

Improvements That Qualify

IRS Publication 523 groups qualifying improvements by category. The full cost of materials and labor for any project on this list goes into your basis.¹

Additions: bedrooms, bathrooms, decks, garages, porches, and patios.
Lawn and grounds: landscaping, driveways, walkways, fences, retaining walls, and swimming pools.
Systems: heating, central air conditioning, furnace, ductwork, central humidifier, central vacuum, air and water filtration, wiring upgrades, security systems, and lawn sprinkler systems.
Exterior: new roof, new siding, storm windows and doors, satellite dish, and insulation for attics, walls, floors, pipes, or ductwork.
Plumbing: septic system, water heater, water softener, and filtration systems.
Interior: built-in appliances, kitchen modernization, new flooring, wall-to-wall carpeting, and fireplace installation.

Converting Unfinished Space

Finishing an attic into a bedroom or turning a basement into a guest suite is one of the highest-value projects for basis purposes because it usually pulls in several qualifying categories at once. A single job may involve insulation, electrical wiring, flooring, and egress windows. Each component qualifies on its own, and together they produce a substantial basis adjustment.

Outdoor Work

Landscaping and grounds work confuses homeowners because some of it clearly qualifies and some of it clearly doesn’t. Installing a new driveway, building a retaining wall, or putting in permanent landscaping adds to your basis. Mowing the lawn, trimming hedges, or reseeding bare patches is routine upkeep and does not. The same value-or-longevity test applies outside as inside.¹

What Doesn’t Qualify, and the One Exception

Routine upkeep that preserves the home in its current condition cannot be added to your basis. Fixing a leaky faucet, replacing a single broken window, patching drywall cracks, cleaning gutters, servicing your furnace, and painting walls inside or out are all personal living expenses under the IRS rules. These costs maintain what you already have.¹

The exception worth knowing: repair work done as part of a larger improvement project can be folded into the improvement cost. Replacing a few broken windowpanes on their own is a repair. Replacing every window in the house is an improvement, and those same broken panes become part of the project total. The IRS specifically allows this bundling when the repair is part of an extensive remodeling or restoration.¹ Homeowners routinely leave money on the table here by tracking the cabinets and countertops on a kitchen remodel while forgetting the drywall patching and minor plumbing fixes that were part of the same job.

Energy-Efficient Upgrades: Improvement Yes, But Subtract the Credit

Solar panels, high-efficiency insulation, double-paned windows, and similar energy upgrades qualify as capital improvements and raise your basis. There’s a catch that many homeowners miss: if you claimed a residential energy tax credit for the upgrade, you have to subtract the credit amount from the basis increase. The improvement still counts, but only for the portion you actually paid out of pocket after the credit.³

Say you spent $15,000 on solar panels and received a $4,500 residential clean energy credit. Your basis goes up by $10,500, not $15,000. This rule applies to both the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit. If you’re planning to sell in the next few years and expect a gain above the exclusion, run the numbers both ways before deciding whether to claim the credit; the basis increase is sometimes worth more.

Original Closing Costs That Also Raise Your Basis

Improvements aren’t the only things that lift your basis. Certain settlement fees from when you first bought the home count too. You can include title insurance premiums, transfer or stamp taxes, recording fees, survey fees, legal fees for the title search and deed preparation, abstract fees, and charges for installing utility services. The Closing Disclosure or HUD-1 settlement statement lists all of these.¹

Not every closing cost qualifies. Mortgage insurance premiums, homeowner’s insurance premiums, loan origination fees and discount points, appraisal fees required by a lender, and any pre-closing rent or utility charges cannot be added to your basis. Those are treated as costs of financing or occupying the property, not of acquiring it.⁴

Why This Matters Even With the Home Sale Exclusion

Single filers can exclude up to $250,000 of gain on a primary residence sale, and married couples filing jointly can exclude up to $500,000, provided they meet the ownership and use tests.⁵ It’s tempting to conclude that improvements don’t matter if you’re under those numbers. In many markets they still do. Gains above $500,000 on a long-held primary residence are no longer unusual, and any gain above the exclusion is taxed at long-term capital gains rates. High earners can also face the 3.8% Net Investment Income Tax on that same gain, which applies once modified AGI exceeds $200,000 for single filers or $250,000 for joint filers.⁶ Every documented improvement dollar above the exclusion threshold reduces a tax bill at rates that can reach into the low twenties.

Two other situations put pressure on basis regardless of market: a home you ever rented out or used for a home office triggers depreciation recapture that the Section 121 exclusion does not shelter, and a home you inherited or received as a gift has starting-basis rules of its own. Those are separate questions from what counts as an improvement, but they raise the stakes on getting the improvement list right.

Records to Keep

Every improvement you plan to add to your basis needs paper backing it up. The IRS expects invoices from contractors, receipts for materials, cancelled checks or bank statements showing payment, and records showing when the work was done and what it was.⁷ Start a folder, physical or digital, on the day you close on the home and add to it with every project.

Your original Closing Disclosure or HUD-1 belongs in that folder too, since it establishes your starting basis and documents the qualifying closing costs. Keep property records until the statute of limitations expires for the tax year in which you sell. In practice, that means holding onto everything for at least three years after you file the return reporting the sale, which for most owners means keeping improvement records for the full time you own the home plus three years after.⁸ A contractor invoice from year three of ownership is worth exactly as much as it’s legible when you sell in year twenty.

1
Internal Revenue Service. Publication 523 (2025), Selling Your Home
2
Office of the Law Revision Counsel. 26 U.S. Code 1016 – Adjustments to Basis
3
Internal Revenue Service. Instructions for Form 5695 (2025)
4
Internal Revenue Service. Basis of Assets
5
Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Internal Revenue Service. What Kind of Records Should I Keep
8
Internal Revenue Service. How Long Should I Keep Records