Once you determine your original basis in your home, you may have to add or subtract certain amounts to arrive at your adjusted basis for tax purposes.
Increases in basis
Your basis is increased for permanent additions or improvements you make to your home, special assessments for local improvements, and amounts you spent after a casualty loss in order to restore damaged property.
Improvements are permanent in nature and should be differentiated from repairs, which maintain the condition of your home. For example, painting your home, inside or out, is considered a repair. Improvements add value to your home, prolong its life, or adapt to for new uses. Some examples of improvements include the addition of rooms, a garage, deck, or patio; putting in a driveway, installing a pool, sprinkler system, or landscaping; installing a heating or air conditioning system; putting on a new roof; re-wiring your home; installing carpeting or flooring; and modernizing your kitchen or bathroom.
Special assessments for local improvements may include a sidewalk, for instance, and amounts you had to spend to restore your home after a casualty loss are permanent in nature, and do not include clean-up expenses.
Decreases in basis
You should decrease your basis for any gain you postponed from the sale of a previous home before May 7, 1997, deductible casualty losses and insurance reimbursements, payments you received for an easement or right-of-way, and any depreciation you claimed as a deduction if you used part of your home for business purposes.
There is a worksheet in IRS Publication 523, Selling Your Home, that will help you calculate the adjusted basis.