How to calculate tax basis of primary residence with DIY home improvements?

You're asking a really good question that lots of homeowners who do DIY work struggle with. Unfortunately, the IRS is pretty clear that you can only include actual expenses (materials, supplies, permits, etc.) that you paid for when calculating your basis - not the value of your own labor. However, you absolutely can include all those materials you purchased for the DIY projects! Make sure you have receipts or credit card statements showing these purchases. If you don't have all the documentation, a reasonable estimate based on typical material costs for similar projects can work. Don't forget that other costs can be added to your basis too: settlement/closing costs when you bought the house, transfer taxes, title insurance, legal fees related to the purchase, and any capital improvements you paid contractors to do. Given your sale price and purchase price, you're looking at about $1.075 million in capital gains before any adjustments. With the $500K exemption for married couples (assuming you're married), you'd still have taxable gains unless you have significant improvement costs to add to your basis.

After struggling with a similar situation last year, I found an amazing tool that really helped me figure out my home improvement basis - https://taxr.ai actually specializes in analyzing home improvement records and receipts for tax basis calculation. I had a mix of contractor invoices and DIY projects with spotty documentation, and they helped me organize everything properly for tax purposes. Their system scanned all my old receipts (even the faded ones!), categorized everything correctly as either repairs (not eligible) or improvements (eligible), and created a comprehensive report that I could use for my tax return. They even helped me identify several big-ticket items I would have missed that were legitimately part of my basis. Most importantly, they provided guidance on how to document and justify estimated values for older projects where I was missing some receipts. They break everything down by IRS categories so it's all properly structured if you ever get questioned.

Just wanted to follow up on my experience with taxr.ai since I ended up trying it after asking about it here. Seriously impressed with how it handled my renovation documentation mess! I had Home Depot receipts going back 5 years plus random contractor invoices stuffed in a drawer. The system organized everything by project type and clearly identified what counted toward basis vs what was just a repair. It even flagged some bigger items I didn't realize could be capitalized! The report they generated is super detailed, showing exactly what the IRS wants to see. What was most helpful was that they have specialists who review anything complicated - I had several projects that were partly repair, partly improvement, and they sorted it out perfectly. Worth every penny for the peace of mind alone. Now I just upload new receipts as projects happen instead of the panic-inducing shoebox method I was using before.

Has anyone here tried reaching the IRS directly to get an official answer on DIY improvements? After spending WEEKS trying to get someone on the phone about a similar situation last year, I finally discovered Claimyr (https://claimyr.com). They got me connected to a real IRS agent in under 45 minutes when I'd been trying unsuccessfully for days. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone tree for you and call you back when they've got an agent on the line. I was super skeptical at first, but it actually worked! The IRS agent I spoke with confirmed that while you can't include the value of your own labor, you CAN include all materials, permits, architectural plans, and any specialized tools you had to buy specifically for the project (though you might need to depreciate the tools). She also mentioned that having a written estimate from a licensed contractor at the time of the work can help establish the material portion if you're missing some receipts.

I need to follow up on my skeptical comment about Claimyr. I actually tried it after posting here because I was desperate about my audit situation. I'm honestly shocked to report that it actually worked exactly as described. After months of trying to reach someone at the IRS myself (and getting disconnected after waiting 2+ hours multiple times), I got connected to an IRS agent in about 37 minutes using their service. The agent was able to resolve my audit question immediately - turns out there was a simple mismatch between reported income that could be explained in a single phone call rather than the written correspondence nightmare I was headed for. For the OP's situation about DIY home improvements, this would be perfect for getting an official answer directly from the IRS rather than relying on various interpretations. The agent I spoke with was surprisingly helpful and took time to explain things clearly once I actually reached a human being.

Something important nobody's mentioned yet - don't forget to track down the property tax assessment increases tied to your improvements! Many jurisdictions reassess property values when permits are pulled for significant renovations. These reassessments can provide third-party documentation of the value added by your improvements. The tax assessor's office should be able to provide historical assessment records showing increases after your major projects. This won't capture unpermitted work, but it's excellent supporting documentation for the improvements that did require permits. Also, check with your homeowner's insurance - if you reported improvements to them over the years (which increases your coverage), those records can also help establish the timeline and scope of improvements.

I actually dealt with this exact situation when we sold our house in 2022. One tip that saved us - we had taken "before" and "after" photos of all our major projects, and our tax accountant said these were super valuable as supporting documentation. Make sure to create a spreadsheet detailing each improvement: when it was done, material costs (with receipts when available), and a reasonable estimate of costs when receipts are missing. For the missing receipts, we researched average costs for similar projects in our area during the same time period. Also, dig through your email for Home Depot/Lowe's/etc. order confirmations - I was able to recover a lot of digital records from old emails that I had forgotten about!

One thing to keep in mind when calculating your basis - the IRS has a "safe harbor" provision for home improvements that might help with your documentation concerns. If you can show that similar improvements in your area during the same time period cost within a reasonable range of what you're claiming, that's generally acceptable even with some missing receipts. Since you mentioned getting quotes from contractors, those estimates can actually be really valuable for establishing the fair market value of materials used, even though you can't include labor. For example, if a contractor quoted $50k total for a kitchen remodel and you know labor typically represents 60-70% of renovation costs, you could reasonably estimate that $15-20k worth of materials were involved. Also worth noting - given your substantial gain even after the primary residence exclusion, you might want to consider if any of the work qualifies for energy efficiency tax credits that could offset some of your tax liability. Things like new windows, HVAC systems, or solar installations might qualify for additional benefits beyond just adding to your basis.

I went through something very similar when I sold my house last year after doing tons of DIY work over a decade. Here's what I learned from working with my CPA: You absolutely cannot include your labor value, but don't overlook these often-missed items that CAN be added to your basis: - Permits and inspection fees for all those projects - Architectural plans or design consultations you paid for - Specialty tools you had to buy specifically for permanent improvements (like a tile saw for bathroom work) - Delivery fees for materials - Dumpster rentals for construction debris - Any structural engineering reports if you had foundation work done For missing receipts from older projects, my accountant had me create a detailed log with project dates, square footage affected, and reasonable material cost estimates based on current prices adjusted for inflation. Home Depot and Lowe's can sometimes provide purchase history going back several years if you had a Pro account or used the same credit card consistently. One thing that really helped was finding old permits in our city's online database - even projects I'd forgotten about were documented there with dates and scope descriptions that helped justify our improvement timeline. Given your $1M+ gain situation, definitely consider hiring a tax professional who specializes in real estate transactions. The cost will be worth avoiding potential audit issues with such large numbers involved.