Will Refinancing My House Affect Capital Gains When Selling?

So if I refinance and pull out $50k for a kitchen remodel, that $50k gets added to my basis? But if I use the cash for my kid's college tuition, it doesn't change anything tax-wise for the house?

Exactly right. If you use the money for home improvements, like your kitchen remodel example, that $50k gets added to your basis which can reduce your taxable gain when selling. This is why keeping receipts and documentation of all improvements is so important. If you use the refinance money for anything not related to improving the home, like college tuition, that has no impact on your basis or capital gains calculations. The money might as well have come from any other source at that point.

Does it work with older mortgage documents? I refinanced twice in the last 10 years and I've been terrible about keeping records organized. Can it help me figure out what my actual basis is at this point?

I'm a bit skeptical about these tax tools. How does it actually determine what home improvements qualify vs just telling you generic advice you could get anywhere? Does it give actual specific advice for your situation?

Yes, it works with older mortgage documents! I uploaded refinance papers from 2019 and it was able to extract all the relevant data. The tool creates a timeline of your property transactions which is super helpful for tracking basis changes over time. As for specific advice, it's much more than generic information. It analyzes your actual documents and identifies which expenses qualify as basis-increasing improvements versus repairs (which don't increase basis). For example, it flagged that my new roof counted toward basis but my regular maintenance expenses didn't. It's definitely personalized to your specific situation based on the documents you provide.

Wait, is this a service that just calls the IRS for you? How does that even work? Why would that be faster than me calling myself?

This sounds like total BS. There's no way to "skip the line" with the IRS. They're understaffed and everyone has to wait. I'm calling shenanigans on this.

It's not exactly calling for you. What they do is use technology to navigate the IRS phone tree and wait on hold for you. When they reach a live agent, they call you to connect with the agent. So you don't waste your time on hold - you only get called when there's actually someone to talk to. I was skeptical too. But it works because they're basically waiting in line for you using automated systems. The IRS doesn't give them special treatment - they're just handling the frustrating wait time so you don't have to. I was surprised too, but it genuinely worked when I needed clarification about refinancing documentation.

Do solar panels count as a capital improvement that increases basis? We spent $32k on a system in 2023 but got $9k back in tax credits. Would our basis increase by the full $32k or just $23k after the tax credit?

Solar panels definitely count as a capital improvement that increases your basis. For your specific situation, your basis would increase by the full installation cost of $32k, not the net amount after tax credits. The tax credits reduce your tax liability but don't affect your basis calculation. This is actually a great example of an improvement that people often forget to include when calculating their basis. Just make sure to keep all documentation of the purchase and installation for when you eventually sell.

I sold last year after owning for 11 years with 3 refis. My advice: create a spreadsheet NOW. List purchase price, all closing costs, and every improvement with dates and amounts. I was able to document an additional $78k in basis that I would have forgotten about. Also, scan everything and keep digital copies - my oldest paperwork was faded and barely readable when I needed it.

This is really helpful! I'm new to understanding capital gains and this breakdown makes it much clearer. Quick question - when you say "certain costs" that add to basis, what exactly qualifies beyond the obvious home improvements? Are things like title insurance from the original purchase or legal fees from refinancing included? I want to make sure I'm not missing anything that could help reduce my eventual tax burden.

Great question @Alana Willis! Yes, there are several "certain costs" beyond improvements that can add to your basis: From your original purchase: - Title insurance premiums - Recording fees - Transfer taxes - Attorney fees for the purchase - Survey costs - Inspection fees However, refinancing costs typically do NOT increase your basis - those are usually treated as loan origination costs that get deducted over the life of the loan or when you pay it off. Other basis-increasing items people often miss: - Special assessments for local improvements (sidewalks, sewers, etc.) - Casualty losses not covered by insurance - Legal fees to defend your title Keep in mind that regular mortgage interest, property taxes, and homeowners insurance don't increase basis since you likely already deducted those annually. The key test is whether the expense adds permanent value to the property or extends its useful life. I'd recommend creating a comprehensive list now while the details are fresh in your memory!

This is such practical advice, @Nolan Carter! I'm definitely going to start that house file system you mentioned. One thing I'm curious about - you mentioned photos before/after renovations. Do those actually help with the IRS if they question your basis calculations, or are they more for your own records? I've got tons of photos from our recent bathroom remodel but wasn't sure if they had any official value for tax purposes. Also, when you say "even small improvements add up" - is there a minimum threshold the IRS cares about, or should I really be tracking every little thing like new light fixtures or cabinet hardware?