DOES IT MAKE FINANCIAL SENSE?
- There is a good chance that aesthetic improvements don’t make financial sense.
- However, personal desires may still prevail!
- Sleep on it! Take a reasonable amount of time to make sure the commitment is appropriate.
- Some improvements might reduce operational costs over time, which could mitigate some of the initial costs.
- Sometimes the trade-off between repairing and replacing old items can be attractive.
- Reduction of hassle factors or mitigation of safety issues should be part of the decision.
PAYING FOR THE IMPROVEMENTS
- Saving and paying cash is the preferred strategy.
- However, a home equity loan may be an option.
- Beware that some loan interest rates (especially for home equity lines of credit) are variable and may increase!
- Ultimately ensure that the improvements will fit into your family’s budget.
- Your home is a personal-use asset. Expenses for personal-use assets generally are not deductible for tax purposes.
- However, you may be able to deduct mortgage interest for debt used to substantially improve your home.
- You may also be eligible to deduct interest for a home equity loan used to finance improvements.
- Tax credits are also available for certain energy-saving improvements.
- Some expenses may be deductible for tax purposes if you use a portion of your home for business.
- You must regularly use a specific portion of your home as your principal place of business. The designated portion must be used exclusively for conducting business.
- The home office deduction typically allows qualifying taxpayers to deduct a percentage of certain operating expenses.
- However, some home improvements might be fully deductible depending upon facts and circumstances.
- The IRS does allow a simplified option ($5 per square foot up to a maximum of 300 square feet) that reduces complexity.
- Employees might qualify for the home office deduction if the home office is for the convenience of their employer.
- Beware that depreciation deductions could create taxable gains when you ultimately sell your home.
- IRS Publication 587 provides copious details. https://www.irs.gov/pub/irs-pdf/p587.pdf
- Real estate taxes may increase if the assessed value of your property increases.
- You may need to update insurance coverage. Particular improvements, such as the addition of a wood stove, fireplace, swimming pool or detached structure may significantly impact your insurance policies.
- Determine if improvements will increase your operational costs (utilities, maintenance, insurance etc.) to ensure that these improvements fit into your family’s budget.
- Keep records regarding the cost of major home improvements. Even though federal tax law provides a healthy exclusion of gains from the sale of a principal residence, there is always a chance that gains could be taxable. Major improvements may impact your basis and ultimately your gain when you sell your home.
Courtesy: Chris Harper, www.hungerfordnichols.com
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