Smart Money: Home Improvements - Financial Considerations

Home Improvement - Financial Considerations

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.

TAX BENEFITS

  • 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.

HOME-BASED BUSINESSES

  • 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

OTHER CONSIDERATIONS

  • 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

© 2017 WZZM-TV


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