It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.
Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.
The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.
What Counts As a Capital Improvement?
Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.
Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.
There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.
There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement.
One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.
How Capital Improvements Affect Your Gain
To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.
Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.
Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.
Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the 15% tax rate on capital gains. Well worth taking an hour a month to organize your home improvement receipts, don’t you think?
Related: Tax and Home Records Checklist: What to Keep and For How Long
The top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.
Watch Out for These Basis-Busters
Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.
- If you use the actual cost method and take depreciation on a home office, you have to subtract those deductions from your basis.
- Any depreciation available to you because you rented your house works the same way.
- You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.
- If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.
Read more: http://www.houselogic.com/home-advice/tax-deductions/tax-breaks-capital-improvements-your-home/#ixzz3SZThuAXJ
When buyers are on the hunt for a new home, they're usually very focused on one thing: the house. Buyers can lose objectivity if they fall in love with one, and the thought process becomes akin to one of those romantic photos with fuzzy edges—the only thing in focus is the house.
What those fuzzy edges obscure, however, is just as important as what's in focus. So, be sure to identify the impractical features of a home you love—not only for your own comfort and enjoyment, but for the home's future value as well.
"Location, location, location" isn't just a silly real estate mantra—it's a warning. Pay heed to the neighborhood and surroundings if you want to avoid losing money when you sell the home.
1. School District
Not everyone can afford the higher cost of homes in a quality school district, but we can avoid purchasing a home in a district that will make it difficult to sell in the future. Even homebuyers without children should look into the area's schools before signing on the dotted line.
For homebuyers with children, good schools are at the top of the list, according to Realtor.com, and many are willing to go over budget to purchase such a home.
Experts agree that homes are worth more in good school districts. What they can't seem to agree on, however, is how much more. One study claims that the added value is $16,000 on average. Another study, from the Brookings Institute, says homes in quality school districts may fetch up to $205,000 more than those in a low-scoring district. Finally, another expert says to simply slap a 23 percent premium onto a home in a good school district.
Whatever the amount, savvy buyers know that an area's schools will have an impact on a home's future value.
2. Vacant Land
Being surrounded by open space is lovely, isn't it? The peace, tranquil views and that feeling of seclusion one derives from living in such a location is worth paying more for—or is it?
Nearby government set-asides of open space are in demand for homebuyers. Privately owned vacant parcels, however, should raise red flags.
Even current zoning of parcels isn't set in stone, as neighbors in a Minneapolis suburb learned last year.Most homeowners in a 25-year old subdivision there purchased their homes because the area was surrounded by open space. What they failed to realize, however, was that the surrounding parcels were zoned for commercial development. In fact, many of the newer homeowners were shocked when they learned of the city's plans to approve the construction of a 24-hour superstore right across the street. Their lovely, wooded neighborhood would now be expected to handle three times the vehicular traffic, round-the-clock hustle and bustle, and late-night deliveries to the back of the store, which happens to face the neighborhood.
Before you decide to purchase any home that has vacant parcels of land nearby, it would be wise to check the neighboring property's zoning.
3. Neighboring Homes
It's easy to become smitten with the cutest house on the block, but if that house is the only cute one in the neighborhood, you may want to consider your purchase more carefully.
Foreclosed homes, certain commercial concerns (funeral homes and power plants, for example), messy, neglected yards, and a sex offender in the area can all drag down the value of nearby property, according to the Appraisal Institute. That reduction may be as much as 15 percent.
Experts with the Appraisal Institute suggest taking a leisurely tour of the neighborhood. Something as simple as shoddy landscaping or peeling paint on a building can knock 5 to 10 percent off the value of nearby homes, the Appraisal Institute's president, Joe Magdziarz, told MSN Money.
Folks in the real estate industry are quite diligent when it comes to recommending various inspections and tests of structural elements to buyers. Many agents, however, may neglect to counsel their clients on the financial aspects of the purchase.
Your home is also an investment and requires due diligence to ensure that it's a viable one. Do your homework, beyond admiring the snazzy kitchen and dreamy master bedroom, and you'll sleep well knowing you made an informed investment.
Are you ready to start looking for your new home? Call me. Start searching homes for sale here:
Is 2015 the year that you will buy your new home? This is an excellent article about the intangibles that home ownership offers. Call me (551-427-6343) for a free consultation about buying your first home or move-up, and together we’ll create a plan to make it happen!
This article was posted by The KCM Crew on December 23, 2014:
Last week, we reported on the financial reasons that the New York Times felt that homeownership was important. The Joint Center for Housing Studies at Harvard University performs a study every year surveying participants for the reasons that American’s feel are most important in regards to homeownership.
There’s No Place Like HomeThe top 4 reasons to own a home cited by respondents were not financial.
1. It means having a good place to raise children & provide them with a good educationFrom the best neighborhoods to the best school districts, even those without children at the time of purchasing their home, may have this in the back of their mind as a major reason for choosing the location of the home that they purchase.
2. You have a physical structure where you & your family feel safeIt is no surprise that having a place to call home with all that means in comfort and security is the #2 reason.
3. It allows you to have more space for your familyWhether your family is expanding, or an older family member is moving in, having a home that fits your needs is a close third on the list.
4. It gives you control over what you do with your living space, like renovations and updatesLooking to actually try one of those complicated wall treatments that you saw on Pinterest? Want to finally adopt that puppy or kitten you’ve seen online 100 times? Who’s to say that you can’t in your own home?
The 5th reason on the list, is the #1 financial reason to buy a home as seen by respondents:
5. Owning a home is a good way to build up wealth that can be passed along to my familyEither way you are paying a mortgage. Why not lock in your housing expense now with an investment that will build equity that you can borrow against in the future?
Bottom LineWhether you are a first time homebuyer or a move-up buyer who wants to start a new chapter in their life, the holiday season is a great time to reflect on the intangible factors that make a house a home.
Courtesy of the KCM Blog.
Home buyers enter the process with one of two mindsets. There are those who know what kind of house they want – the number of bedrooms and bathrooms, the type of kitchen and maybe whether or not they want a yard. Then there are those who know where they want to live, such as a specific school district or neighborhood, but haven’t completed a wish list of home features.
Seldom does a buyer tell his/her real estate agent that she wants a “three-bedroom, two-bathroom home with a gourmet kitchen, a fireplace and a pool in the backyard, located on J Street in the Mountain Shadows neighborhood.”
While it’s important for your real estate agent to know what features you want in a home, “location, location, location” is just as important, important, important.
Even if you know exactly what you want in a house and perhaps have one picked out, it’s important to scope out the neighborhood before committing fully to buying.
Don’t Believe What You Hear
Especially when you are new to an area, it’s easy to believe what residents tell you about the various neighborhoods. Remember, however, that everyone has different opinions and personal tastes. When someone says, “This school is not as good as that school,” keep in mind that everyone has differing needs, wants and preferences. One man’s ceiling is another man’s floor.
While it's sometimes helpful to get others' views, there is nothing quite like first-hand information. If schools are important to you, do the research yourself instead of relying on what others say. GreatSchools.org lists schools’ test scores and features reviews from parents.
Crime statistics can also be found online. You can also call the police department for more information on crime statistics. FYI, Mahwah was recently named the safest town in New Jersey.
Google maps are great for figuring out routes from the new house to your job, to a particular school, or to the nearest shopping center and they give you the mileage and a rough estimate of the time it will take to get there. You can also use Google maps’ earth view to see what’s around the neighborhood – are there railroad tracks running behind the property? Is there a huge water tank nearby? Is the property too close to a highway for your liking? What’s that large industrial-looking building one block over?
A lot of your preliminary neighborhood research can be done online, but it’s not a substitute for actually checking out the neighborhood in person.
If you commute to work, you should take “a test drive.” Whether that’s driving, taking the train or bus, it’s a good idea to actually make the commute during normal commute hours to see if it fits your lifestyle. You don’t want to settle into a home only to find out that the commute is a nightmare — far worse than you had expected.
Drive through the neighborhood at different times during the day and evening, on both weekdays and weekends, looking for anything that may be considered an annoyance. Is the street much busier during the weekday rush hour than you had anticipated when you first saw it on a quiet Sunday afternoon?
You may also want to drive around to see how far it is to stores, schools, parks, gyms, houses of worship, and other places that are important in your life.
If you don’t drive, walk the neighborhood. Locate the nearest public transportation stop and see for yourself what the walk is like to the store and other local conveniences.
Check Municipal Records, Local News
Check the neighborhood and surrounding area for anything that may impact the home’s value. Look for things like a high number of foreclosures nearby, new developments in the works, and upcoming zoning changes. You can also find out a lot about what’s going on in a town or neighborhood by reading a local newspaper or checking out the local Patch.com.
Find a Local Agent You Can Trust
Especially if you’re moving to an area that is new to you, it’s important to find a local agent who is familiar with the area(s) you’re considering. You want to make sure you find a trusted real estate professional who knows the neighborhoods, the schools, the shops, the restaurants, distances to highways, etc. – all the factors that are important to you when considering where to live.
If you’re considering a move to Mahwah, give me a call. I have lived in North Jersey my whole life and in Mahwah for the past 20 years. I can answer your questions and help you with the inside info you need to find the perfect home.
These properties were listed and sold by various participants of the NJMLS based on information
from the New Jersey Multiple Listing Service, Inc. for the period from January 1, 2014 to
January 31, 2014. Information reliable, not guaranteed. Not responsible for errors/omissions.
I recently read an excellent piece about five important things you should do if you're getting ready to buy a home:
1. Get you finances in order
2. Practice good credit behavior
3. Shop around for the best loan
4. Enter the market early
5. Find a real estate agent now.
Read the full article at www.NorthJerseyAbode.com.
If you're thinking about buying a home this year, give me a call and let's talk about how you can prepare for it. Start your search here:
As reported in the Star-Ledger and published on NJ.com:
New Jersey's safest community straddles the state's border with New York.
That's according to a ranking published by security organization SafeWise, which has determined Mahwah is the Garden State's safest place.
Mahwah, a township of about 26,000 in northern Bergen County, edged Sparta in Sussex County for top honors.
SafeWise determined its rankings by combining 2011 FBI crime data with other factors such as unique safety initiatives and security programs, the company said in a release.
A municipality must have at population of at least 15,000 to qualify for the list.
SafeWise said it was impressed with the Mahwah police's Stay Connected app in which citizens can report zoning violations, service requests and other concerns. Mahwah police didn't report any murders, rapes, robberies or arson in 2011.
Two other Bergen communities also made SafeWise's top 10: No. 6 Dumont and No. 8 Bergenfield.
Sparta got high marks for its low poverty rate (1.5 percent). Sparta cops reported fewer than 20 burglaries in 2011.
"From relaxed rural countrysides to fast-paced city living, the 50 safest communities in New Jersey share one critical, crime stopping characteristic: community cohesiveness" SafeWise security analyst Alexia Chianis said.
Here is SafeWise's Top 50:
Making the decision to sell your home begins a journey of a thousand steps. From hiring a real estate agent to getting the home ready for the market, there is a lot to do.
Luckily, homeowners have a tool belt full of items that make the job easier. The most powerful tool of them all is decorating – better known as staging. Done right, staging your home will help it sell faster and for more money.
Before you hire a decorator, or decide to do it yourself, you’ll need an appropriate backdrop – a clean, uncluttered space. Otherwise, staging the home is like putting lipstick on a pig.
There are several reasons homeowners should clear their homes of the clutter accumulated from daily living. First, clutter makes people anxious.
The results of a nine-year long UCLA study show that there is “real psychological stress associated with clutter.”
The last thing you want a potential buyer to feel is stress or anxiety when touring your home.
Since most clutter in a home is a collection of personal items, depersonalizing the home goes hand-in-hand with clearing clutter. Sure, all those personal items are what makes your house a home, but too many of them may hinder its sale.
Buyers need to be able to imagine what it would be like living in your home, surrounded by their belongings. Your stuff detracts from their ability to do that. Besides, you will have to move all that stuff once your home sells, so you might as well do it sooner rather than later.
Depersonalizing: What’s Involved?
Depersonalizing is the act of removing most items of a personal nature. Family photographs, souvenirs, collections, DVD and CD collections and framed diplomas, degrees and awards are a few examples of items to pack up and store.
Since you’ll need boxes for the move, buying them now saves work later on. Buy several boxes for each room in the house, and don’t forget newspaper or other packing material to protect breakables.
The best way to go about depersonalizing the home is to do it one room at a time.
Living Room and Family Room
Since this is where families spend most of their time, these rooms will most likely take the longest. Items to remove include:
Now we move from the most challenging room to the easiest room to depersonalize – the kitchen. The biggest clutter catcher in this room is the refrigerator. Remove the magnets, sticky note reminders, kids’ artwork and personal photographs. In fact, remove everything from the front, sides and top of the refrigerator. Unless it’s decorative, pack it all up.
Many families use the kitchen counter as a mail drop. There’s nothing particularly wrong with that, but mail is highly personal and needs to be put away, out of sight.
Since bedrooms are the most personal of all the spaces in a home, they can be challenging to depersonalize. Remove family photos, of course, but you may need to go beyond that. Imagine a posh hotel room and remove anything from the bedrooms that you wouldn’t find in one.
Bathrooms tend to become cluttered with personal products. While it isn’t necessary to pack these items up, it is crucial that they be put out of sight in cupboards and drawers.
Don’t forget the shower stall or bathtub. Buyers will pull back the shower curtain. Would you want to be greeted by pumice stones, shampoo bottles or kids’ water toys? Again, think of a posh hotel bathroom and try to imitate that look.
The home office is typically one of the most cluttered rooms in the home and also a hot selling feature, so it’s important to create a vignette that appeals to the target market for the home.
Attack the walls first, taking down awards, diplomas and degrees, and photos.
Clear the desk of mail, work papers and professional journals and magazines.
As you work on depersonalizing each room in the home, don’t just throw the items in the boxes. Wrap and pack for the move and then take the boxes to a storage facility.
Don’t forget to organize what’s left in the room – it puts you one step closer to staging the home.
Should You Hire a Stager?
Everyone’s situation is different. Some homes don’t need staging. Of those that will benefit from staging, the extent of what needs to be done will vary from one home to another.
As part of my listing service, I offer a consultation with a stager, at no charge to the homeowner. During the initial consultation, the stager will offer suggestions. If the homeowner feels that they need more help in getting the house ready for sale, they can then hire the stager at an hourly rate.
If you’re thinking of selling your home, it’s never too early to call in a real estate agent to talk about the entire home-selling process, including staging. Give yourself plenty of time to get your home ready, to maximize your sale.
Call me if you want to talk about getting ready to sell. 551-427-6343.
Beautiful, well-maintained 2BR condo for rent in Paddington Square. First floor end unit offers privacy and convenience - no stairs to climb! Ample closet space, washer/dryer in unit, newer (June 2013) stainless steel appliances in kitchen. Call/message for more info.
Listed by Candace Larson, Keller Williams Village Square Realty.
201-445-4300 x 222
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