We're doing some home renovations using a handyman and the project is about to end. Just realized that I need receipts to document proof of expenses for the future. The handyman does not have a regular company. Our payments have been through check and cash. What should I do to get my records straightened out? Would having the handyman provide a typed up receipt with a brief description be enough as proof for the IRS when I sell the house and claim a deduction?
The more documentation, the better. At a minimum, the cancelled checks written to the handyman provide practical documentation. A written receipt with a work description would help. If permits were issued, that could provide another element of proof. In the future, I'd suggest taking before and after pictures of projects. Keep it all in a file for the property in question, with a sub-file for each project. I maintain a spreadsheet for my home showing all maintenance an capital improvements to show dates, costs (for each receipt) and subcontractors or who did the work. Good question!
What you're looking for is documentation for calculating the "basis" in your property. Assuming that you are inquiring about a primary residence, there is no "deduction" for repairs or renovations as there may be if this were an investment property.
An itemized receipt from the handyman supported by copies of the cancelled checks and any other receipts will be more than sufficient. At the very least a printed statement produced by the handyman indicating the totals for materials and labor will be a good start. (Use any cancelled checks or credit card statements as additional back up in the event of an audit).
Now when you sell your home, you'll add up all the receipts for outlays made for improvements during the time you lived in the property. You'll also add in your original purchase price plus certain closing costs incurred for any financing. You'll also be able to add to your basis any real estate sales commissions or other closing costs (excluding recurring things like property taxes or water/sewer charges) you may incur upon your sale.
And if when you sell the property you are not widowed or divorced, you'll be able to automatically exempt $500,000 above the total "basis" that all of these things add up to.
Example: You buy a home for $200,000. Over the years you do improvements that total $100,000. You sell the property for $800,000 and incur a 6% real estate commission ($48,000).
Your basis in this example is $348,000.
Assuming the exemption for a married couple remains at $500,000, then the entire gain on paper of $600,000 ($800,000 sale price less $200,000 purchase price) will be exempt from any capital gains.
IRS Publication 523 directly addresses all the items that are included or excluded from basis. Generally, financing costs that appear on a HUD-1 Settlement Statement from any financing (purchase or refinance) are allowed. The items that are not part of the basis calculation generally include legal fees, title fees, recording fees, survey/plot plans, tax stamps, and owner's title insurance. Not included are items for getting the loan. The most prominent among these are points. Presumably you got a tax benefit for these during the loan's term because you would have included these on your Schedule A - Itemized Deductions.