See Cost Basis. It's just this...adjusted.
You paid $1 million for your home, and sold it 12 years later for $2.2 million. You have a long-term capital gain tax to hit you on that $1.2 million of gain.
But you were extremely careful in keeping your receipts to show the capital improvements you made to the house. That tennis court? Fifty grand. The pool? Forty. Decking? Twenty. Add up all the improvements you made to the property, and they were a cool 300 grand. So your cost basis of $1 million needs to be adjusted upwards to $1.3 million, so that your taxable gain is "only" 900 grand, and not $1.2 million.
And that 300 grand of adjusted basis just saved you, at 30% long-term gain rates, a court and a pool. Who said shoeboxing doesn't pay?
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