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A house is much more than just a shelter. For many homeowners, it serves as a private bank.
When structured properly, the money you can draw from the equity in your home can provide a nice tax break. In most cases, a homeowner can deduct interest paid on a home equity loan or home equity line of credit (HELOC) of up to $100,000.
The key phrase, however, is "in most cases." There are some deductibility limits. The alternative minimum tax also might also negate the benefits. So before tapping into the residential vault, homeowners should carefully evaluate their overall financial needs and tax situation.
Many uses, one big tax break
Home equity funds are often used to pay for home improvements, remodeling and renovations, college costs or consolidate personal loans and credit card debt. By leveraging the money already put into a house, an owner typically has access to larger sums of money to pay for these items.
And, of course, there is the tax advantage.
"When you talk about taxation and home equity, you primarily look at the deductibility of the interest," says Jim Hiles, a certified financial planner with CBIZ Wealth Management in New York. The tax law allows a borrower to deduct interest on a home equity loan or a combination of loans up to $100,000, regardless of how the money is used.
"It certainly is a popular way to pay," says Hiles, "if you can deduct the interest."
It's that "if" that trips up some home equity borrowers. Whether it can be deducted and exactly how much interest on a home equity loan is deductible depends on several factors.
Interest on $100,000 ... maybe
Most homeowners focus on the $100,000 amount that's usually touted as "deductible" in ads for home equity products. But borrowers also need to be aware of how their property's fair market value and any existing mortgage could affect the tax break.
When the combination of all loans secured by a home, including the first mortgage and any other equity loans, are more than the property's fair market value, the interest on the portion of debt that exceeds the home's value is not deductible.
For example, you have a $95,000 mortgage on your home, which is now worth $110,000. Your bank says you qualify for a 125 percent loan-to-value equity loan of $42,500 ($110,000 x 125 percent = $137,500 minus $95,000 left on your first mortgage = $42,500). Because your son has outstanding college tuition bills and you'd also like to buy him a car to get to and from school, you take the bank up on the offer, planning to deduct the interest on the equity loan on your taxes. It is, after all, well below the $100,000 limit.
Not so fast. This is where the value of your home comes into play. Tax rules say that in these circumstances, you can deduct interest on equity loans up to $100,000 or, when the total amount of all loans secured by a home is more than its fair market value, on the equity amount that does not exceed the property's value, whichever is less. In this case, that's $15,000 ($110,000 minus $95,000).
So, your tax deduction is limited to the interest on just $15,000 of your home equity loan. You can't deduct the interest on the remaining $27,500 of the equity loan even though it is secured by your home and well below the $100,000 limit.
Improved breaks for home improvement
"There is one loophole," says Hiles. "When an equity loan is used for home improvement, it gets a different tax treatment."
In this situation, the equity funds are essentially treated as first mortgages. In IRS terms, this is known as acquisition indebtedness.
"This is a loan that you get to build your house or substantially improve your house," says Hiles. "Adding on a second story or redoing the house counts as acquisition indebtedness. On these loans, you can deduct interest on up to $1 million in mortgage debt."
For instance, if you took out a $200,000 home equity loan to add an audio/video entertainment room to your $500,000 home, you could deduct all the interest paid on that loan. However, if you used that $200,000 to pay for a lengthy European vacation, you could deduct only the interest paid on the loan's first $100,000.
There's no requirement that you document how you spent your equity loan funds, but it's a good idea to hang onto receipts just in case. Hiles says comprehensive records could be crucial in ensuring that you keep your allowable acquisition-debt interest if you're ever audited.
Other equity loan considerations
Home equity borrowers also need to keep an eye on possible alternative minimum tax implications. This parallel tax system could cost some taxpayers their deduction.
Interest on acquisition-debt loans is still deductible under the AMT. However, money secured by your home but used for nonresidential purposes is disallowed.
The tax gap -- money the IRS says it is owed, but which taxpayers have not paid -- also could also pose some problems for equity-loan borrowers. Tax officials and members of Congress believe that improperly claimed home-related tax deductions have contributed to this collection deficit.
"They've announced that they may ask taxpayers to produce documents of original mortgage to verify that interest is indeed within the limit," says Marck Luscombe, principal tax analyst at CCH, a tax publisher and software provider. If the IRS finds that you've incorrectly claimed home equity loan interest, it will ask you to pay it back, along with penalty and interest charges.
Finally, keep in mind that while a home equity loan amount might seem relatively small, it still is secured by your residence. "At the end of the day, the bank wants its money back and your home is the collateral," says Hiles. "You could be forced to move out if you don't repay the debt."
This content was originally from BankRate.com
VISIT WWW.PROPLAYERSREALTY.COM FOR ALL OF YOUR TALLAHASSEE, FLORIDA REAL ESTATE NEEDS!
OR
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John Stehmeyer Realtor/Broker Buyers Specialist First Time, Move Up and Luxury Consumer Resources Advisor Graduate Realtor Institute Investors Consultant Property Marketing Expert Remodeling Renovations Coordinator Seniors Real Estate Specialist 850-CALL-942-SOLD! ProPlayersRealty.com John will make your best deal buying and selling! Values God, Family, Work At Pro Players Realty you are family and You come before work! This message is not intended as a solicitation to any individual whose property is listed exclusively with another broker.
VISIT WWW.PROPLAYERSREALTY.COM FOR ALL OF YOUR TALLAHASSEE, FLORIDA REAL ESTATE NEEDS!
OR
CALL (850) 942 - SOLD TO SPEAK WITH ME, JOHN, PERSONALLY!
John Stehmeyer Realtor/Broker Buyers Specialist First Time, Move Up and Luxury Consumer Resources Advisor Graduate Realtor Institute Investors Consultant Property Marketing Expert Remodeling Renovations Coordinator Seniors Real Estate Specialist 850-CALL-942-SOLD! ProPlayersRealty.com John will make your best deal buying and selling! Values God, Family, Work At Pro Players Realty you are family and You come before work! This message is not intended as a solicitation to any individual whose property is listed exclusively with another broker.
VISIT WWW.PROPLAYERSREALTY.COM FOR ALL OF YOUR TALLAHASSEE, FLORIDA REAL ESTATE NEEDS!
OR
CALL (850) 942 - SOLD TO SPEAK WITH ME, JOHN, PERSONALLY!
John Stehmeyer Realtor/Broker Buyers Specialist First Time, Move Up and Luxury Consumer Resources Advisor Graduate Realtor Institute Investors Consultant Property Marketing Expert Remodeling Renovations Coordinator Seniors Real Estate Specialist 850-CALL-942-SOLD! ProPlayersRealty.com John will make your best deal buying and selling! Values God, Family, Work At Pro Players Realty you are family and You come before work! This message is not intended as a solicitation to any individual whose property is listed exclusively with another broker.
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| Midrange Projects |
| Attic Bedroom | $48,398 | $35,694 | 73.8% |  |
| Backup Power Generator | $14,040 | $8,026 | 57.2% | |
| Basement Remodel | $61,011 | $44,467 | 72.9% | |
| Bathroom Addition | $38,078 | $24,187 | 63.5% | |
| Bathroom Remodel | $15,899 | $11,857 | 74.6% | |
| Deck Addition (composite) | $15,277 | $11,260 | 73.7% | |
| Deck Addition (wood) | $10,601 | $8,676 | 81.8% | |
| Family Room Addition | $81,315 | $53,608 | 65.9% | |
| Garage Addition | $57,272 | $38,161 | 66.6% | |
| Home Office Remodel | $28,094 | $15,329 | 54.6% | |
| Major Kitchen Remodel | $56,611 | $43,030 | 76.0% | |
| Master Suite Addition | $101,571 | $67,037 | 66.0% | |
| Minor Kitchen Remodel | $21,246 | $16,881 | 79.5% | |
| Roofing Replacement | $18,825 | $12,336 | 65.5% | |
| Siding Replacement (vinyl) | $10,256 | $8,274 | 80.7% | |
| Sunroom Addition | $71,745 | $40,715 | 56.7% | |
| Two-Story Addition | $146,538 | $103,553 | 70.7% | |
| Window Replacement (vinyl) | $10,537 | $8,132 | 77.2% | |
| Window Replacement (wood) | $11,512 | $8,946 | 77.7% | |
| Upscale Projects |
| Bathroom Addition | $74,325 | $49,100 | 66.1% | |
| Bathroom Remodel | $51,455 | $36,400 | 70.7% |  |
| Deck Addition (composite) | $37,498 | $23,706 | 63.2% | |
| Garage Addition | $85,844 | $53,908 | 62.8% | |
| Major Kitchen Remodel | $110,964 | $78,398 | 70.7% | |
| Master Suite Addition | $223,876 | $136,764 | 61.1% | |
| Roofing Replacement | $36,296 | $22,861 | 63.0% | |
| Siding Replacement (fiber-cement) | $13,177 | $11,424 | 86.7% | |
| Siding Replacement (foam-backed vinyl) | $12,528 | $10,074 | 80.4% | |
| Window Replacement (vinyl) | $13,608 | $10,781 | 79.2% | |
| Window Replacement (wood) | $17,580 | $13,455 | 76.5% | |
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VISIT WWW.PROPLAYERSREALTY.COM FOR ALL OF YOUR TALLAHASSEE, FLORIDA REAL ESTATE NEEDS!
OR
CALL (850) 942 - SOLD TO SPEAK WITH ME, JOHN, PERSONALLY!
John Stehmeyer Realtor/Broker Buyers Specialist First Time, Move Up and Luxury Consumer Resources Advisor Graduate Realtor Institute Investors Consultant Property Marketing Expert Remodeling Renovations Coordinator Seniors Real Estate Specialist 850-CALL-942-SOLD! ProPlayersRealty.com John will make your best deal buying and selling! Values God, Family, Work At Pro Players Realty you are family and You come before work! This message is not intended as a solicitation to any individual whose property is listed exclusively with another broker.
Despite home price drops in many cities, remodeling projects are holding their own as a way for owners to add value.
Many people are wondering where their money will be safest during these uncertain economic times. When home owners turn to you for your expert advice, counsel them that some things never change: Investing in their home still pays off.
NATIONAL ASSOCIATION OF REALTORS® statistics show that home prices have fallen by an average of 7 percent nationally in the past year. But the value of home owners’ investment in remodeling projects has declined only 3.86 percent on average between 2007 and 2008, according to Remodeling’s 2008–2009 Cost vs. Value Report.
Remodeling produces the Cost vs. Value Report each year in cooperation with REALTOR® magazine. REALTORS® responding to a survey in midsummer said home owners could expect to recoup a national average of 67.3 percent of their investment in 30 different home improvement projects. At the height of the housing boom in 2005, home owners could expect to recoup a national average of 86.7 percent on projects.
Remodeling remains hot in 10 cities, where, on at least some projects, home owners can recover 100 percent of their costs. In Charlotte, N.C., for example, decks, midrange kitchen remodels, vinyl siding, and window-replacement projects all would net more than they cost, in respondents’ estimation. High rates of recovery were seen in both strong real estate markets and weak ones.
Many cities with the highest rates of recovery were smaller—Jackson, Miss., and Billings, Mont., for example—which may point to lower labor and materials costs that are easier to recoup.
Seattle also made the list of cities with a cost recovery of more than 100 percent on decks and minor kitchen remodels. In fact, Pacific Coast cities recorded the best payback on remodeling by a wide margin, as they did in 2007. Although construction costs on the Pacific Coast are nearly 17 percent higher than national averages, the value of renovations at resale more than makes up for those higher prices.
The result is an average cost-recouped percentage that’s 14.8 percent higher than in the rest of the country. The toughest place to get your money back: Midwestern cities such as Chicago, Cleveland, Indianapolis, and Milwaukee.
Top 10 Project Paybacks
Once again, exterior remodeling projects lead the way for recovery on dollars spent in this year’s Cost vs. Value survey. When you compare the national averages, replacement projects that boost curb appeal—siding, windows, and decks—give you the greatest chance of recouping your money. Inside, only kitchen remodels can compare, at least on a national level.
1. Upscale fiber cement siding (86.7%)
2. Midrange wood deck (81.8%)
3. Midrange vinyl siding (80.7%)
4. Upscale foam-backed vinyl (80.4%)
5. Midrange minor kitchen remodel (79.5%)
6. Upscale vinyl window replacement (79.2%)
7. Midrange wood window replacement (77.7%)
8. Midrange vinyl window replacement (77.2%)
9. Upscale wood window replacement (76.5%
10. Midrange major kitchen remodel (76.0%)
The Real Deal: Examples from You
REALTORS® around the country helped us track down home owners who had recently completed remodeling projects. In all cases, the projects cost far less than the job cost estimates provided with the Cost vs. Value survey.
ATTIC-TO-BEDROOM
Location: Oak Park, Ill.
When Rick Nagle and Eileen Deamer of Oak Park, Ill., spent more than $35,000 to convert the attic of their 100-year-old home into a combination master bedroom and office, "resale value wasn’t our concern," says Deamer, a U.S. government employee and the married mother of two.
The transformation turned 600 square feet of makeshift office with a toilet in the middle of the room to a colonial-style bedroom/office with two walk-in closets and an adjoining sage green bath with a walk-in shower. To allow two simultaneous uses, pocket doors separate the bedroom and office spaces.
BATHROOM
Location: Fountain Hills, Ariz.
"This is such a crazy market to try to judge how much a renovation is worth, but having a refurbished kitchen and bathrooms makes almost any house more salable," says Shari Gay, ABR®, sales associate at RE/MAX Sun Properties in Fountain Hills, Ariz. The owner—Gay’s sister—added Saltillo clay floor tile throughout the 1,800-square-foot home, including the new bathroom. Bathroom finishes included a new cherry vanity cabinet, a tile shower, oil-rubbed bronze fixtures, and a soothing, sophisticated yellow color scheme, which all add up to a great look.
Total cost? About $5,000. "She’ll at least break even on the upgrades," predicts Gay. "If this were a boom market, she would get even more."
KITCHEN
Location: Honolulu
A kitchen is the heart of most homes. That’s why Hollywood set designer Wally White decided to spend most of his $15,000 renovation budget on upgrading the kitchen of his Honolulu studio condo. To spruce up the existing white cabinetry, which he left to save costs, the owner added bursts of color with celadon green granite countertops and walls painted in a complementary shade of light green. An undermounted white porcelain sink, a six-light halogen fixture on a dimmer, and brushed stainless steel faucet completed the look. It paid off.
White grossed $45,000 when he sold eight months later. "The unit sold for more than any other studio—and most of the one-bedroom condos in the building," says Susan Weinik, a sales associate with Realty Executives Oahu.
BASEMENT
Location: West Brighton, N.Y.
In a modest 1950s ranch in West Brighton, N.Y., a midrange basement upgrade suited Bernard Fallon’s mother-in-law, Ligaya Nocon, just fine. After purchasing her home "on the high end of the market," according to Fallon, broker at Fallon Associates Realty in Rochester, N.Y., Nocon kept basement renovation costs under $9,000.
She created a cottage feel by whitewashing the knotty pine paneling rather than replacing it. She also reupholstered the existing bar to cover wear and warmed up the room with wall-to-wall carpeting instead of wood or tile. "We just dressed it up for the personal enjoyment of my mother-in-law," says Fallon, "but I think it will help sell the property later."
The Specs
To help respondents determine the resale value of improvements, the survey provided specifications for each project:
Why Renovation Pays
Why are renovations holding their value better than home prices today? "When housing slows down, people stay put and renovate their house to make it more livable," says Paul Zuch, president of Capital Improvements, a designing, building, and remodeling company in Dallas. And by renovating before they sell, home owners get to enjoy the new space themselves, not just make the home more appealing to buyers. "It just makes sense," says Zuch.
Recent renovations also make buyers’ lives easier. "Home owners who remodel their home are providing a service to future buyers," says Eileen Nelis, a broker at Savvy and Co. in Charlotte, N.C. "When buyers purchase, they don’t want to do all that painting and remodeling, and they don’t want that price tag. They may be willing to make improvements down the line, but when they purchase, they want to open the door and have everything complete. It reduces their stress."
Making home improvements can also reduce sellers’ stress by heading off that time-honored negotiating technique—pecking away at the sales price by pointing out imperfections. "If sellers have done some improvements and dressed up their property, the improvements will help sell it," says Bernard Fallon, broker at Fallon Associates Realty in Rochester, N.Y. "If sellers don’t want to improve their property, buyers will tick off the repairs and try to take them off the price."
That doesn’t mean that every home owner should do every renovation, even in a more stable real estate market. Take Tulsa, Okla., where median home prices actually edged up slightly more than 2 percent in 2008, according to NAR. REALTORS® in Tulsa reported that, of the 30 remodeling projects surveyed, only 16 netted home owners at least 80 percent of the cost.
"Not every neighborhood will support the additional work," says Jim Hemphill, a sales associate at Coldwell Banker Select in Tulsa, "but in older, more established neighborhoods, if you redo a kitchen or bathroom or add a master bath or bedroom, you’ll get your money out."
Despite the value, the weak economy is likely to slow seller spending on remodeling, at least in the short term, predicts the most recent Leading Indicator of Remodeling Activity computed by the Joint Center for Housing Studies at Harvard University.
The LIRA for the third quarter of this year estimated that owners’ spending on home improvements will decline at an annual rate of 12 percent by the second quarter of 2009, continuing a two-year downward trend. Spending is unlikely to recover until the housing market turns around, according to the Center.
Yet, despite declines in overall remodeling dollars spent and a still shaky housing market, "people’s homes are still one of their best, most solid investments," notes Zuch. "Even though the markets have gone through some adjustments, it’s still smart to invest in your home."
G.M. Filisko is a freelance writer for REALTOR® magazine. You can contact magazine staff at narpubs@realtors.org.
VISIT WWW.PROPLAYERSREALTY.COM FOR ALL OF YOUR TALLAHASSEE, FLORIDA REAL ESTATE NEEDS!
OR
CALL (850) 942 - SOLD TO SPEAK WITH ME, JOHN, PERSONALLY!
John Stehmeyer Realtor/Broker Buyers Specialist First Time, Move Up and Luxury Consumer Resources Advisor Graduate Realtor Institute Investors Consultant Property Marketing Expert Remodeling Renovations Coordinator Seniors Real Estate Specialist 850-CALL-942-SOLD! ProPlayersRealty.com John will make your best deal buying and selling! Values God, Family, Work At Pro Players Realty you are family and You come before work! This message is not intended as a solicitation to any individual whose property is listed exclusively with another broker.
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