Tracking cost basis on a second home before you sell

When you sell a home that is not your primary residence, a vacation home, a pied-à-terre, an inherited house you kept, the capital gain is generally the sale price minus your cost basis. The higher your basis, the smaller the taxable gain. And cost basis is not just what you paid for the house. It grows, over the years, with the capital improvements you make.

The problem is almost never the tax rule. It is the records. By the time a home is sold, the new roof was eleven years ago, the kitchen renovation was a different decade, and the receipts are gone. The improvements were real; the proof is not. This guide is about building that proof while it is still easy to build.

A note before anything else: this is general education, not tax advice. Tax rules are detailed, they change, and they depend on your specific situation. Use this to understand what to keep and why. Use a qualified tax professional to decide how it applies to you.

Improvements add to basis. Repairs generally do not.

The distinction that matters is between a capital improvement and a repair.

• A capital improvementadds value, prolongs the home’s life, or adapts it to a new use. A new roof, an addition, a renovated kitchen or bathroom, a new HVAC system, replacement windows, a pool, significant landscaping, a finished basement. These generally add to your cost basis.
• A repair keeps the home in its existing condition: fixing a leak, repainting a room, patching, replacing a broken part. These generally do not add to basis. (Repairs done as part of a larger improvement project can be a different matter, which is one more reason to keep the whole project documented together.)

The line is not always obvious, and it is exactly the kind of judgment a tax professional is for. What you can do, with no ambiguity, is keep the record so the judgment can be made later with real evidence in front of it.

What a basis record should contain

For every project that might be a capital improvement, capture and keep:

• The receipt or invoice. What was done, by whom, and what it cost. This is the core of the record.
• The date. When the work was completed. Basis is a dated, accumulating record.
• Proof the work happened. Photos before and after, permits, the contract. A receipt plus a photograph of the finished work is far stronger than a receipt alone.
• Contractor and warranty details. Useful for the home anyway, and they corroborate that the work was real.

Keep all of it together, per property, organized by date. A shoebox of receipts is technically a record; it is not one you will be glad to find under audit.

Build the record as you go, not at the closing table

The single most important habit is timing. File each improvement when it happens, while the invoice is in your inbox and the photos are on your phone. Reconstructing a basis record at sale time means chasing down a decade of contractors and bank statements, and accepting that some of it is simply unrecoverable.

A practical routine: every time a project on a property finishes, before you move on, save the invoice, take a photo of the result, note the date, and mark whether you believe it is an improvement or a repair. Five minutes, once, on the day it is effortless.

Why this matters most for a portfolio

Owners of multiple non-primary homes have the most to gain here, for two reasons. First, more homes mean more improvement projects, and the dollar figures on a complex home are large. Second, these are the homes the primary-residence exclusion does not cover, so the basis record is doing real work at sale rather than being moot.

There is a quieter benefit too. The same dated, photo-backed record that supports your cost basis is also your insurance documentation, your renovation history, and, for an heir, the evidence behind a stepped-up basis. It is one record that pays off in several directions, and it only gets more valuable the longer you keep it.

Capturing capital improvements as they happen is something HomesRun is built to make automatic: a bill or a project on a property can be classified as basis-adding, the receipts and photos already live with the home, and the running adjusted basis is there when you need it. But the principle stands with or without any software, start the record now, keep it per property, and keep it dated. Your future self, or your accountant, will be grateful.