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While some brokers and advisers will tell you that keeping track of your basis is now unnecessary, since the first $250,000 in gain on sale of your home won't be taxed and probably won't even need to be computed, you're on much safer ground if you retain these records.
Knowing the basis of your home is important for several reasons besides computing your gain when you eventually sell the home.
For example, if you suffer a casualty loss to the home, your deductible losses may be limited by the amount of your tax basis in the home. If you don't have accurate records of that, you may lose some of your tax benefits at a time when you need them most.
If you ever decide to rent out some or all of your home (for example, if you decide to move when the housing market is very slow and you need to find a tenant to cover your mortgage payments with some income for an extended period of time), you'll need to know your tax basis in order to determine your depreciation deductions. Similarly, if you ever decide to use part of your home for business, depreciation is usually computed on the business portion of the home's tax basis.
If you purchased your first home many, many years ago and since then you've moved several times, deferring gain each time by purchasing a more expensive home under the old rollover replacement rule, you may have deferred tens or hundreds of thousands of dollars already, and the basis of your current home may be very low. If so, you may hit the $250,000 in capital gains mark very quickly.
Finally, if it turns out that you stay in your home for a long time, you should realize that the $250,000 exclusion of taxable gain on the sale of the home is not indexed for inflation. The value of the exclusion is bound to be eroded as time passes.
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Example
If we look at the exclusion in today's dollars, at a modest 3 percent inflation rate, the value of $250,000 in ten years will be only $186,023. In 20 years it will be worth $138,418, and in 30 years it will be worth only $102,996 in
2007 dollars.
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Long-time homeowners may well find that they end up paying some capital gains tax on their home, but they may pay more than necessary if they haven't kept track of their basis over the years.
And all of this assumes that Congress won't change the law to either increase or, more likely, decrease the amount of the exclusion or change the rules for claiming it!
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