The 1997 Taxpayer Relief Act introduced a capital gains exclusion of $250,000 for single homeowners and $500,000 for married couples when selling a primary residence – provided they had lived in the home for at least two of the previous five years. At the time, those numbers felt substantial.

Back in 1997, the average home price in Boulder County was around $200,000. Today, that average has climbed to roughly $624,000, with the City of Boulder exceeding $1 million. Yet the gain exclusion hasn’t increased in 28 years. When the law was passed, most American homeowners could sell without facing a capital gains tax bill. While that’s still true in some parts of the country, in Boulder County – and especially within Boulder city limits – appreciation has far outpaced the tax relief.

Because of this widening gap, it’s more important than ever for homeowners to maintain thorough records of capital expenditures. These improvements increase the home’s tax basis, helping reduce potential capital gains liability when it’s time to sell.

Here’s an example of how this works. Suppose a single homeowner purchased a property for $350,000 and later sells it for $700,000. The $250,000 exclusion would apply, but the remaining $100,000 in gain would be taxed at the long-term capital gains rate – typically 15% for individuals with incomes between $40,001 and $441,450. In this scenario, the tax due would be $15,000. (There are additional adjustments to basis, but they’re not included here for simplicity.)

Now consider the same example with $100,000 of documented, verifiable capital improvements. Those improvements raise the tax basis from $350,000 to $450,000. The resulting gain is $250,000 – the full exclusion amount for a single homeowner – meaning no capital gains tax would be owed.

This is why homeowners should keep thorough records, including receipts and photos, of all home improvements. When it’s time to sell, a tax professional can help determine which expenses qualify as capital improvements that may be added to the basis. Some items will be considered repairs and won’t count toward reducing taxable gain.

In general, a repair is considered routine maintenance – such as basic plumbing fixes, replacing a broken window, or adding Freon to an air conditioner. A capital improvement, on the other hand, is something that adds value to the home or extends its useful life. Examples include adding square footage, replacing all the windows, installing a new roof, or upgrading to a new furnace.

Other expenses at the time of sale may also help reduce your taxable gain. These can include brokerage commissions, certain fix-up costs to prepare the home for market, and other allowable selling expenses.

If you’re considering selling and anticipate a substantial gain, be sure to consult both your Realtor® and a tax professional for the latest updates before entering into a contract.

Duane graduated from the University of Colorado with a business degree and a major in real estate in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 3,000 transactions over his career. Duane has been awarded Realtor® Emeritus by the National Association of Realtors and the Circle of Legends by RE/MAX LLC. Duane is also the author of two books, Realtor for Life and The Velocity of Wealth. You can reach out to Duane at BoulderPropertyNetwork.com or at DuaneDuggan@boulderco.com