By: Mary Rae Hunter
With all the talk of a slower real estate market, perhaps some of today's homeowners might be tempted to excuse themselves from time-honored "honey-do"- painting, roof repair, carpet upgrades, window-replacements, and so forth. The thinking here is that money spent today on a home might not bring a return tomorrow when the home is sold. I was therefore intrigued to read an article by tax attorney, Stephen Fishman.
In his Real Estate column, Fishman points out many positive economic aspects of home improvements. To begin with, he observes the tax law's distinction between "improvements" and "repairs." Specifically, home "improvements" obtain tax benefits, while home "repairs" do not. An improvement to a home such as a "new bathroom or kitchen" may increase the value of a home, but it will certainly "reduce any taxes on the profit earned from its sale." Alternatively, simple home repairs (such as fixing a leak in a roof or replacing some broken tile in a floor) are neither deductible costs nor an adjustment to the tax basis.
Not to get lost in the legalese of tax law, but Fishman's point is important for North Carolina homeowners. Our market is relatively stable and robust. Under the law, when one sells a home (that is not an investment property), there is no tax on the first $250,000 ($500,000 for married owners). A home that is purchased for, say $225,000 and is later sold for $325,000 means that, for a single person, $75,000 is subject to taxes. The rule changes, however, when that same individual has made improvements to the home over the years that amount to $75,000. In such a case, there is no tax on the home.
The IRS considers a repair to be something that keeps property "in good operating condition." However, work that materially adds value to the property, prolongs its useful life, or makes the property "more useful" or gives it "new uses" will be considered an improvement. Fishman realizes that the line of distinction between repairs and improvements is not always clear. If work on a home returns it to a state it was in before the need arose causing you to spend money, then it is likely a repair, not an improvement. However, if the home is made better by the work and expenditure, then it is likely an improvement. Work like fixing gutters, floors, leaks, plaster, and broken windows are generally classified as repairs, while adding a deck, a new bathroom, installing heating or air systems, or adding landscaping are generally classified as improvements.
Major honey-dos, in other words, can add vale to the property - and save taxes too.