Thinking about a fresh kitchen or new windows before you list your D.C. home? The tax angle can be confusing. You want every dollar to count, but you also want to avoid spending on updates that do not move your net. In this guide you will learn when pre-listing work helps you tax-wise in D.C., what counts as an improvement versus a repair, how federal rules like Section 121 apply, and how local transfer taxes factor in. Let’s dive in.

The short answer for D.C. sellers

For most owner-occupied homes, pre-listing renovations are not deductible right now. The IRS treats qualifying capital improvements as additions to your basis, which can reduce taxable gain when you sell. Ordinary repairs usually do not change basis. See the IRS overview on selling a home and basis rules for details in Topic No. 701 and Publication 530.

If you meet the Section 121 test and sell your primary residence, you can often exclude up to $250,000 of gain if single or $500,000 if married filing jointly. If your total gain stays under that exclusion, adding to basis will not produce extra tax savings, though it still helps if your gain ends up higher than expected. Review the ownership and use rules in Topic No. 701.

Washington, D.C. generally follows the federal treatment. D.C. starts with federal adjusted gross income and taxes capital gains as part of ordinary income when they are not excluded. See the D.C. perspective on capital gains conformity from the D.C. Fiscal Policy Institute and how federal amounts flow to your D.C. return in the D-40 instructions.

Repairs vs. capital improvements

What adds to basis

Capital improvements are projects that add value, extend the home’s life, or adapt it to a new use. Common examples: additions, a new roof, a major kitchen or bath remodel, or new central HVAC. These costs are added to your basis, which can reduce gain on sale. See the IRS guidance in Publication 530.

What usually does not

Routine maintenance is typically not capitalized. Painting, patching, and small cosmetic fixes are usually repairs that keep the home in good working order. On their own, they do not add to basis. If repairs are part of a larger remodel, the full project may be treated as an improvement, so document scope and invoices. See Publication 530.

Selling costs that reduce gain

Your gain is also reduced by typical selling costs, such as real estate commissions, legal fees tied to the sale, and certain closing costs. Keep your settlement statements and invoices. The IRS explains these adjustments in Publication 523.

Section 121 and why it matters in D.C.

If you owned and used the home as your main residence for at least 2 of the last 5 years before the sale, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly. Many D.C. sellers never owe federal or D.C. income tax because their gain is fully excluded. If you expect to be under the exclusion, the tax reason for doing extra pre-listing work is usually weak. Still, keep receipts in case your final gain exceeds the limit. Read the rules in Topic No. 701.

Energy upgrades: credits vs. basis

Certain energy-efficient upgrades can qualify for federal tax credits. If you claim a credit, you get immediate tax savings that year, but you must reduce your basis by the amount of the credit. That can lower the basis benefit when you sell. Review the basis reduction rule in the Instructions for Form 5695.

D.C. transfer and recordation taxes

Separate from income tax on gain, D.C. imposes deed transfer and recordation taxes that are calculated as a percentage of the sale price. Rates vary by tier and exemptions. If renovations raise your sale price, these transaction taxes can increase accordingly. Check current guidance in the Recorder of Deeds FAQs.

Special situations that change the outcome

Part rental or business use

If your home was rented out or used for business, depreciation taken after May 6, 1997 is generally not eligible for the Section 121 exclusion and may be subject to depreciation recapture when you sell. Review the IRS coordination rules in Rev. Proc. 2005-14 and consider modeling your exposure with a tax professional.

Prior 1031 exchange

If you acquired the property through a like-kind exchange within certain timeframes, special rules can limit or delay Section 121 benefits. See IRS guidance in Rev. Proc. 2005-14.

Frequent flips or dealer activity

If you regularly buy and sell houses as inventory, Section 121 does not apply and different rules govern your income and costs. If your facts approach dealer treatment, consult a CPA early.

A quick example

• Purchase price: $400,000
• Qualifying pre-listing improvements: $30,000
• Selling price: $550,000
• Selling costs: $33,000
• Amount realized: $517,000
• Adjusted basis: $430,000
• Gain: $87,000

If you qualify for the full Section 121 exclusion, the entire $87,000 is typically excluded for federal and D.C. income tax. Tax due on the gain: $0. In this case, your $30,000 of improvements may help marketability and speed, but they do not add a separate tax savings. If your gain exceeded the exclusion or you did not meet the time tests, the $30,000 basis increase could reduce taxable gain dollar for dollar. See Topic No. 701 and Publication 523 for how to compute gain.

What to keep and how to plan

• Purchase records: original settlement statement and closing disclosures.
• Improvement documentation: contracts, permits, invoices, and proof of payment that show labor and materials. Note whether each item is an improvement or a repair.
• Energy credit records: Form 5695 amounts so you can reduce basis properly.
• Sale records: final closing disclosure, commission agreement, and any legal or advertising invoices.
• Rental or business-use records: dates of use and depreciation claimed.
  See the recordkeeping guidance in Publication 530.

If you want help scoping and managing value-adding projects, our Canopy Concierge program coordinates and finances pre-listing staging and cosmetic renovations with payment deferred until closing. That lets you focus on strategy while we handle contractors, permits, and presentation.

Decision framework for your D.C. sale

• Estimate your likely sale price and selling costs.
• List planned projects and classify them as improvements or repairs.
• Run the Section 121 test to see if your gain is likely under $250,000 or $500,000. Review Topic No. 701.
• If you will exceed the exclusion, weigh the tax value of basis-adding improvements against cost and timing.
• Check D.C. transfer and recordation taxes so a higher price does not surprise your net. See the Recorder of Deeds FAQs.
• If considering energy upgrades, compare the immediate credit to the required basis reduction using the Form 5695 instructions.
• If you had rental or business use, or a prior 1031 exchange, review Rev. Proc. 2005-14 and talk with a CPA.
• Want turnkey execution and polished marketing in D.C., Bethesda, Potomac, or Arlington? Use Canopy Concierge and our data-first listing process to maximize your outcome.

Ready to model your net and plan smart, presentation-focused updates for a D.C. sale? Reach out to James Buckley for a no-pressure consult and a clear, numbers-first game plan.

FAQs

Are pre-listing renovations tax deductible for D.C. primary homes?

• Generally no. For owner-occupied homes, improvements add to basis and may reduce taxable gain at sale, while most repairs and cosmetic fixes are not deductible. See Publication 530.

How does the Section 121 exclusion affect my renovation decision?

• If your gain will be under $250,000 single or $500,000 married filing jointly, added basis often yields no extra tax savings, though it can help if the gain runs higher. See Topic No. 701.

Do D.C. transfer and recordation taxes change with a higher sale price?

• Yes. These local transaction taxes are based on the sale price, so a higher price from renovations can increase them. Check the Recorder of Deeds FAQs.

What if part of my D.C. home was rented or used for business?

• Depreciation taken after May 6, 1997 is generally not eligible for exclusion and may be recaptured at sale, which can change the math on renovations. See Rev. Proc. 2005-14.

Do energy-efficient upgrades help me at tax time if I sell soon?

• Possibly. You may get an immediate federal credit, but you must reduce your basis by the credit amount, which can reduce the later gain reduction. See the Form 5695 instructions.