Uncle Sam doesn’t offer much in the way of tax breaks and incentives for homeowners, but experts say equity rich owners can use basic façade improvements to seek shelter from capital gains taxes at sale time. And with an April 15 tax deadline approaching, few tax deductions for homeowners and double-digit price appreciation reported in California in recent years, smart owners might consider remodeling improvements.
While regular home repairs and maintenance don’t count as capital expenses, capital improvements that prolong the life of the house, increase the value or adapt it for a new use do. Though regular repairs and maintenance (fixing a leak or replacing an air conditioner, for example) don’t count as capital expenses, improvements that prolong the life of the house, increase the value or adapt it for a new use do qualify. Still, you have to distinguish between maintenance and repair items and improvement items. If you plant a tree, that’s an improvement. If you add fence or a swimming pool or central air or a storage unit, that’s an improvement. But if you repair a fence, that doesn’t count. However, if you have to replace the central air unit twice, the expense can only be claimed once. So homeowners should keep careful records (receipts and canceled checks) to substantiate basis adjustments.
The tax code allows homeowners to add the cost of capital improvements to the basis of the house ‑‑ the starting point for the IRS to assess gains and loses and determines capital gains tax. Current capital gains tax exclusions allow married homeowners who have lived in a primary residence for two of the last five years to receive the first $500,000 in profit tax-free. The exclusion for single homeowners is $250,000. So a couple who bought a home for $450,000 in 1995 and sold it for $950,000 last year, for example, can take the $500,000 profit tax-free without needing to increase their basis. But if you bought something in 1945 for $20,000, and you’re selling it for $1 million, you want to add everything you’ve done for the last 59 years to your cost basis to reduce the capital gain. In addition to providing tax shelter, simple touches like adding exterior lighting and ornamental trees to major renovations and additions that change the entire look of a home, a façade makeover can dramatically impact curb appeal, increase resale value and make a home more comfortable.
Harvard’s Joint Center for Housing Studies says about 25 million owners undertake some type of home improvement project this year. Before making any big moves, select low-maintenance materials that work well together ‑ like plaster fascia instead of wood and lightweight artificial stone, for instance. Wood requires regular upkeep. And real stone could be heavy and a problem in earthquake territory. In addition, water features like ponds and fountains, though dramatic, can be difficult to maintain and are better suited to the back of a home.
The best thing you can do in most cases is to trim back the landscaping so you can see the house, add sod and new sprinklers and remove red-flag issues like broken concrete and old driveways. These are all good things to do and can make a huge difference. But what does all that beauty cost? Depending on the material and the labor, façade improvements can be expensive. Door and window trims ($8 to $15 per foot), columns ($20 to $40 per foot), driveway pavers ($5 to $7 per square foot), decorative wall caps ($12 to $20 per foot). Brick veneers ($8 to $10 per square foot) that can be applied up to about 30-inches along the base of a vertical wall and blended with the driveway or a mailbox ($500 to $800) are common façade design elements.
Remodeling magazine’s 2006 Cost vs. Value Report, a joint venture with REALTOR® magazine, found that when comparing the cost of construction with added value at resale, Los Angeles homeowners who replace 10 windows (3-foot-by-5-foot), for example, recouped more than 102% of costs. The cost recouped on home improvement remodels like an attic conversion nationwide was about 80% nationwide and 98% in California. A major (cost: $38,000 to $58,000) kitchen remodel reportedly returns more than 98% of cost in California and about 76% nationally. And adding a bathroom might cost $28,000 to $34,000 but returned more than 90% of cost in California and about 75% nationally.
So don’t be afraid to reinvest in your home. And if refinancing will help you remodel, HomeLoan123.com is ready to help.
Keeping you informed.
Doctor Mortgage
To ask HomeLoan123.com’s Doctor Mortgage a question, e-mail: info@homeloan123.com
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