This week, Gail discusses home improvement, home sales and moving expenses, and discusses what amount of these expenses, if any, can be claimed as tax deductions.
I have a 30-year mortgage on my home that I've lived in for nine years. I have several major home repair projects that I would like to initiate with the help of a home equity loan. Based on my understanding, I can get one in an amount equal to the equity on my home. Would this be considered a second mortgage on the house?
I'm also unclear as to how the IRS defines home improvements for tax credit purposes. I read some tax publication that stated that not all home improvement projects qualified as an allowable deduction, but then I called a tax preparer, and he basically said that any major thing you do to your house is deductible.
Your expertise on these matters would be very much appreciated.
I'm afraid you're confusing two very different issues. The cost of home improvements is not deductible for income tax purposes. However, the interest you pay on a second mortgage IS, up to a certain extent.
According to David Binder, a CPA in Mars, Pa., in order to deduct the interest you pay on your home improvement loan it has to be secured by your primary residence. By definition then, this would be a "second mortgage."
However, if your loan were based on an unsecured line of credit or were backed by some other non-residential asset, such as securities, you could not deduct the interest you pay. Furthermore, the maximum amount of home equity debt for which an interest deduction is available is $100,000.
While it's important to keep track of the money you spend to improve your home, this only comes into play when you sell it. Your improvement expenses are added to the price you originally paid for the home to give you a figure called your "cost basis."
When you sell your home, you subtract your cost basis from the selling price. This tells you what your actual "profit" is. The higher your cost basis, the smaller your profit.
Under the old tax code, you could avoid paying any capital gains tax on the profit you made when you sold your home, as long as you used all of your profit to buy another home for at least the same or a higher amount.
However, this strategy no longer applies. Under current federal law, provided it has been your primary residence for at least two out of the past five years, a single person is allowed up to a $250,000 profit on the sale of his or her home, tax-free. A couple can earn a tax-free profit of $500,000. If the profit on your home exceeds these amounts, then the average will be subject to capital gains tax.
In other words, you can no longer avoid paying tax on the sale of your home by continually "rolling your gains" into a more expensive residence. Keeping careful records of the money you spend on home improvements will, however, reduce the amount of profit you have to report when you do sell so that it comes in under the taxable threshold.
Hope this clears things up,
I am being transferred at my company's request from St. Louis to Dallas. The company is paying my moving expenses only, plus $1000 for house hunting and moving the family. I have had my house on the market for five weeks with no offers (and yes we have reduced the price). The real estate agent says that if we could keep the house on the market for another three to four months we would eventually get our asking price, but to meet the deadline for me to start work, we need to reduce our price by as much as $20,000.
My question is, is there any way from a tax standpoint that I can offset this hit? What expenses related to the move are deductible? I would appreciate any ideas you might have.
The rules regarding moving expenses related to a job were simplified several years ago. You get to deduct what the company doesn't cover. According to David Binder (see letter above), expenses that qualify as deductible are the costs of moving your household goods and personal property and traveling to the new residence. The latter includes mileage on your car and/or the cost of airline tickets for your family and lodging on the way to the new location. You get no deduction for the cost of meals or for house-hunting expenses.
And the costs have to be "reasonable." You don't get to slip a weeklong vacation into your "moving" expenses just because the resort happens to be on the way to your new location.
I'm afraid you are out of luck with regard to the sale of your home. If your cost basis is $250,000 and you sell it for $230,000, that is considered a personal loss. The $20,000 would not be deductible.
I understand the quandary you're in, but it really comes down to weighing a possible loss against the costs of keeping the home and making mortgage payments until it sells. Keep in mind, your realtor is just guessing at how long it might take to sell. What if it takes a year? You'll be stuck paying for housing in two places!
Sorry to be the bearer of disappointing news,
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