Can I Deduct Water Well and Septic System Installation from Capital Gains Tax When Selling?

Thanks for your reply! What about regular maintenance we did on the systems? We had the septic pumped twice ($350 each time) and had to replace a pump for the well ($1,200) last year. Do those count too or just the initial installation?

Regular maintenance like septic pumping wouldn't count as a capital improvement - those are considered repairs rather than improvements. They keep the system functioning as it should, but don't actually add value to the property. For the well pump replacement, it gets a bit trickier. If it was just replacing a broken pump with a similar one, that's generally considered a repair. However, if you upgraded to a significantly better pump that improved the system's overall quality or efficiency, you might be able to count it. The key question is whether it substantially improved the property rather than just maintained its existing condition.

How does it work with receipts that are a few years old? I've got improvements from like 3-4 years ago but some of the documentation is spotty. Can it still help with that?

Did you find it was accurate? I've tried other tax tools that missed pretty significant deductions. Wondering if this one's different or just another tax calculator with a fancy interface.

For older receipts, it actually works really well! The system can analyze even partial documentation and help fill in the gaps based on typical costs for those improvements in your area. As long as you have something showing the work was done, they can usually work with it. As for accuracy, I was honestly surprised. It caught several smaller improvements I didn't realize would count toward my basis - like a french drain system I had installed and some electrical upgrades. The analysis was much more thorough than when I tried using TurboTax's guidance. They use actual tax professionals to review everything, not just algorithms.

How does this actually work? Do they just call the IRS for you? Couldn't I just do that myself? Seems weird that someone else could get through faster than I could.

Yeah right... nobody gets through to the IRS that fast. I've tried calling dozens of times about capital gains issues and get disconnected every single time. If this actually works I'll eat my hat.

They don't just call for you - they use a system that navigates the IRS phone tree and waits on hold for you. Once an agent picks up, you get a call connecting you directly to that agent. So you don't have to sit there listening to hold music for hours. I was skeptical too! But it really does work. They use technology that keeps your place in the queue without you having to stay on the phone. I was doing other things while waiting, then got the call when an actual person was ready to talk. The agent answered my specific questions about documenting capital improvements for my tax basis. Much better than guessing or relying on internet advice.

Oh wow, that's really good to know! We are married and filing jointly, and we've lived here for all 5 years. Does that mean we wouldn't owe any capital gains tax at all since our expected profit is around $95,000? Even without counting the well and septic improvements?

Yes, if you're married filing jointly and lived in the home as your primary residence for at least 2 of the last 5 years, you qualify for the $500,000 capital gains exclusion. Since your expected profit is only $95,000, you'd be well under that threshold and wouldn't owe any capital gains tax on the sale. This exclusion is one of the biggest tax benefits for homeowners! You can use it once every two years. Even though you wouldn't need the well and septic improvements to avoid tax in this case, it's still good to keep those records and add them to your basis for future reference.

This is a really good point. I work in real estate and see this all the time. The IRS doesn't automatically check permits, but if you get audited and have claimed significant improvements, they might ask for permit documentation. Especially for systems like septic that typically require county approval.

That's such a great point about the indirect costs! I never would have thought to include things like site preparation and landscaping restoration. When we had our well and septic installed, there was definitely some excavation work and they had to bring in gravel for the access road, plus we had to reseed a bunch of the yard afterward. I bet those receipts are somewhere in my files - probably worth digging them up even if we won't need them for this sale with the exclusion. Do you know if there's a time limit on how long you need to keep all this documentation? I'm pretty good about keeping receipts but my filing system isn't exactly... organized.

The IRS generally recommends keeping records related to your home's basis for at least 3 years after you file the return for the year you sell the property. But honestly, I'd keep them longer - especially for major improvements like septic systems and wells. Some tax pros recommend keeping home improvement records for 6-7 years just to be safe. For organization, I started using a simple accordion folder with tabs for each year. Whenever I do any work on the house, receipts go straight into the current year's section. Takes like 30 seconds and saves so much headache later! You could also scan everything and keep digital copies as backup. The site prep and landscaping costs you mentioned could easily add another $2,000-$3,000 to your basis, so definitely worth tracking down those receipts even if you don't need them this time around.

This is incredibly helpful advice! The point about documenting the "before" condition with photos is brilliant - I wish I had thought of that when we were dealing with our failing systems. We definitely have the contracts and receipts, but photo evidence of why the work was necessary would have been great backup. One question about the professional appraisal - is that something you'd recommend getting before or after the improvements are made? We're at $28,500 total which is over your $25K threshold. Would an appraisal help establish the added value even if we don't need it for this particular sale due to the exclusion? Also really appreciate the clarification on financing costs. We did put some of it on a credit card initially, so good to know only the principal counts toward basis, not any interest we paid.