Do Pre-Sale Renovation Costs Reduce Your Capital Gain?

Updated September 2026 with FLYP's current project figures.

The short answer

Money you spend on a capital improvement generally gets added to your home's basis, and a higher basis means a smaller gain when you sell. Money you spend on ordinary repairs and maintenance generally does not. The IRS draws that line in Publication 523, Selling Your Home, which explains that improvements "add to the value of your home, prolong its useful life, or adapt it to new uses," and that you add the cost of additions and improvements to the basis of your property. Repairs and maintenance that keep the home in good condition without adding value or prolonging its life cannot go into basis.

One important caveat before anything else. For most Washington sellers, basis is close to irrelevant, because the home sale exclusion wipes out the whole gain anyway. Basis starts to matter a lot when your gain is near or above the exclusion limit, which is exactly the situation for a household that bought in Seattle, Ballard, Bellevue or Tacoma a long time ago.

Also, plainly: this is a general explanation of published IRS and Washington Department of Revenue rules. FLYP is a general contractor, not a CPA firm, and nothing here is tax advice. Run your own numbers with a CPA before you make a decision that depends on them.

How adjusted basis actually works

Basis is the number the IRS subtracts from your sale proceeds to get your gain. Publication 523 walks through it in a worksheet, and the shape of it is simple:

1. Start with what you paid for the home, including many of the settlement costs from your original purchase.
2. Add capital improvements you made and still own.
3. Add certain items like special assessments for local improvements, when those assessments are not merely for repairs or maintenance.
4. Subtract certain adjustments, including depreciation you claimed for business or rental use of the property.

That last one matters for anyone who rented the house out or claimed a home office. Publication 523 specifically tells filers to determine any depreciation amounts they may need to recapture, and to make separate gain calculations for business and residence portions of the property. If your home was ever a rental, that is a conversation to have with a CPA well before you list. Our page on selling a rental property covers the non-tax side of that decision.

Improvement or repair?

Here is the distinction as Publication 523 frames it:

The third row is the one pre-sale sellers should read twice. Publication 523 says the entire job is considered an improvement if items that would otherwise be repairs are done as part of an extensive remodeling or restoration of the home. Its own example: replacing a broken windowpane is a repair, but replacing that same window as part of a project to replace all the windows counts as an improvement. A gut kitchen and bath project with new flooring, new fixtures and new finishes is a different animal from a punch list of fixes, and the paperwork should reflect which one you actually did.

Publication 523 also notes that improvements with a useful life of less than one year when installed do not go into basis, and that if an improvement you once made has been replaced, only the current one counts.

The $250,000 / $500,000 exclusion, in plain language

For the 2025 tax year, Publication 523 sets the maximum exclusion of gain at $250,000, or $500,000 for a married couple filing jointly, and gates it behind an eligibility test. Check the current year's edition before you rely on it. In practical terms, most sellers are looking at three things:

• Ownership. You owned the home for at least two of the five years ending on the sale date.
• Use. It was your main home for at least two of those same five years. Publication 523 states the use test as 24 months, or 730 days, of residence within the five-year window.
• Look-back. You did not exclude gain from the sale of another home in the two-year period ending on this sale date.

Publication 523 also lists automatic disqualifications, including acquiring the property through a section 1031 like-kind exchange during the past five years, and being subject to expatriate tax.

Two situations come up often around Puget Sound. If you and a co-owner are not married, up to $250,000 of gain can be tax free for each qualifying owner. And if your spouse has died, Publication 523 allows a surviving spouse who has not remarried to claim the $500,000 amount when the sale happens within two years of the death, subject to the other ownership and residence requirements. Both are worth confirming with a professional rather than assuming. If you are sorting through an estate or a divorce, see selling an inherited house and selling a house during divorce for the practical steps, then take the tax questions to a CPA or attorney.

Why long-tenured Seattle owners are the ones who hit the ceiling

The exclusion is written as flat dollar amounts. Publication 523 does not scale them by county, by market, or by how long you have owned. A single filer in a neighborhood that has appreciated for decades can therefore run out of exclusion on a house they still consider modest, while a recent buyer in the same zip code has nothing to worry about.

That is the whole reason basis records matter for this reader. If your projected gain lands anywhere near your limit, every documented improvement is doing real work, and every undocumented one is not.

A hypothetical example

Hypothetical example, round numbers only, not a real customer and not a prediction. A married couple bought for $300,000, sold for $900,000, and had $40,000 of selling expenses. Their gain before improvements is in the neighborhood of $560,000, which is more than $500,000. Add $120,000 of documented capital improvements to basis and the gain falls below the exclusion limit. Same house, same sale price, different paperwork. Whether it works that cleanly for any particular household depends on facts a CPA has to look at, including the original purchase costs, any depreciation, and how the work is characterized.

Recordkeeping when the renovation is a fixed-price contract

Publication 523 has a "what records to keep" section for a reason: the burden of proving basis is yours, sometimes many years later. A pre-sale renovation done under a contract is actually easier to document than fifteen years of weekend projects, as long as you keep the whole file.

For a pay-at-closing renovation with FLYP, the documents your CPA will want are the ones you already signed:

• The signed estimate with the fixed contract price and the scope of work.
• Every signed change order. The price is fixed, and every scope change is a signed change order before the work is done, so the scope history is written down rather than remembered.
• The Washington sales tax on the contract, which is part of what gets repaid at closing.
• The county recording fee, and the payoff figure on your closing statement.
• The one-year written workmanship warranty and the final closing documents.

Ask your CPA how each line should be treated. Do not assume that everything on the payoff is an improvement cost. Interest is a good example. There is no interest during the renovation and none for six months after the work is finished, and if the home has not closed by then the balance accrues 1.5% per month. How interest is characterized for tax purposes is a CPA question, not a contractor question. The plain-language summary of what you sign, including the deed of trust that secures the balance and the ten-month due date, is at how the process works.

And the honest part: renovating before you sell is not a sure win. The market can move, a home can sell for less than projected, and interest can accrue after the six-month window. A homeowner can lose money or equity. Across the 12 homes that had a projected after-renovation value in FLYP's underwriting files as of September 2026, out of 16 homes underwritten in total, the projected lift over as-is value had a median of 27% and a range of 1% to 89%, and the projected dollars added had a median of $190,000 and a range of $10,000 to $500,000. Those are projections made during underwriting, not sale results, several files projected almost no lift at all, and no FLYP home has sold yet. If you would rather not take on any of that, selling as-is or paying for a conventional remodel out of pocket are both legitimate answers.

Washington's real estate excise tax is a separate bill

Federal capital gains and Washington's real estate excise tax are two different things, and improvements to basis do nothing to the second one.

REET is a tax on the sale of real property. The Department of Revenue states that all sales of real property in Washington are subject to REET unless a specific exemption applies, that the seller usually pays it, and that the local REET must be calculated and added to the graduated state rate for the total tax due. The state portion is graduated, with rates that run from 1.1% to 3.0% depending on selling price, and the price thresholds are adjusted every four years. Use the Department of Revenue's current rate tables and calculator for your county rather than a rate you remember from a past sale, since both the thresholds and your local add-on matter.

REET is charged on the selling price, not on your profit. A seller with almost no gain and a seller with an enormous gain pay the same REET on the same sale price.

What about Washington income tax on the gain?

Washington does not run a conventional personal income tax, which is why most sellers here are thinking only about the federal side. The state does have a capital gains tax on certain long-term assets, but the Department of Revenue lists real estate as exempt from it, along with interests in a privately held entity to the extent the gain is directly attributable to real estate the entity owns. So the sale of your house does not create a Washington capital gains bill. If your sale involves an entity, a trust or other assets alongside the house, ask your CPA how the exemption applies to your facts.

What to ask a CPA

Bring the file, not the question. A 20-minute conversation with your closing statement, your original purchase documents and your renovation contract in hand is worth more than a general question about capital gains. Useful questions:

• Based on my purchase documents and improvement records, what is my adjusted basis today?
• Do I meet the ownership, use and look-back requirements for the exclusion, and for what amount?
• Is any of my projected gain above the exclusion, and if so, what rate should I plan for?
• Was any part of this home ever a rental or a home office, and do I have depreciation to recapture?
• Which line items on my renovation contract do you consider capital improvements, and what documentation do you want me to keep?
• How should I think about REET and any state filing obligations at closing?

The IRS's own starting points are Publication 523 and Topic No. 701, Sale of Your Home. Read them before the meeting so you can spend the meeting on your facts instead of the framework.

The bottom line

Capital improvements generally raise your basis and shrink your taxable gain; ordinary repairs generally do not. That only changes your tax bill if your gain is near or above the exclusion, which is mostly long-tenured owners in appreciated Puget Sound neighborhoods. Keep the signed estimate, the change orders, the sales tax and the closing statement, because proving basis is your job, not the IRS's. Then have a CPA characterize the line items before you file, and an attorney if title or an estate is involved.

If the conclusion is that renovating before you list makes sense for your house, we can price the scope and tell you what the paperwork will look like. Start here whenever you are ready.