ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, January 22, 1996 TAG: 9601230037
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
Are you thinking of remodeling your home instead of purchasing a replacement house?
If so, you should plan your finances as well as your construction project before undertaking any home improvements. Some improvements also will increase the resale value of your home while saving you tax dollars. Other projects may increase the tax assessment but not improve the resale value.
An updated kitchen, the most popular single project, is also the most cost efficient, according to the cost-vs.-value report of Remodeling magazine.
The Virginia Society of Certified Public Accountants suggested that you keep energy efficiency in mind when you make renovations. As examples, replacing your furnace or adding new double-paned windows may help you reduce your heating bills.
Keep in mind, the CPAs said, that it may not pay to expand your house beyond the norms of your neighborhood.
For instance, you may not be able to recover the cost of adding a large mother-in-law suite equipped with its own kitchen, bath and separate entrance in a neighborhood of small homes.
Similarly, typical home buyers may not be willing to pay extra money for improvements such as pools, tennis courts or elaborate landscaping.
Improvements can add to the tax basis of your home.
When you sell your home, you owe tax on any profit. The profit is the difference between your home's net selling price (selling price less broker, legal fees and the like) and its adjusted basis. (You can defer this tax by purchasing another home of equal or greater value within two years.)
To determine the home's adjusted basis, add the cost of any home improvements to the amount you originally paid for the home.
Adding the cost of improvements to your home's basis means that every dollar you spend to improve your home could shave a dollar off your future taxable gain. That's because the greater your basis, the lower your profit and, therefore, the less taxes you pay.
For tax purposes, the Internal Revenue Service distinguishes between improvements and repairs, the society said.
Expenditures qualify as improvements only if they add to the value of the home, considerably prolong its life or adapt it to a new use.
Examples of improvements, the CPAs said, are converting an attic into living space, installing central air conditioning, adding another bathroom or bedroom, putting in new plumbing or wiring, and paving a driveway.
You can also count storm windows, lighting fixtures, skylights, new trees or shrubbery, treatments to prevent termite damage and waterproofing.
One test to determine if a renovation qualifies as an improvement is whether it is permanent. For instance, the society said, you can add to your basis the cost of built-in bookcases or wall-to-wall carpeting, but the cost of a free-standing bookcase or a room-size rug doesn't qualify.
The IRS says that repairs differ from improvements in that repairs merely maintain or restore your property to good working condition. For example, fixing a leaky roof is considered a repair while installing a new roof is considered an improvement.
Basic repairs and maintenance, such as the cost of painting or repairing gutters, generally offer no tax benefit because they cannot be added to the basis of your home.
How you pay for home improvements also can have an impact on your tax bill, the CPAs said.
Your best strategy, the society said, is to avoid paying interest charges by using as much cash as you can afford to finance the improvement.
If that's not possible, you may want to look into a home equity loan. Interest paid on home equity loans or home equity lines of credit is usually less than the rate charged for other forms of borrowing.
In addition, these types of loans offer a tax break because the interest is usually deductible. (Some restrictions apply to certain high-income individuals.)
Keep in mind that using your home as collateral has serious implications, so you should borrow only an amount you are confident you can repay.
LENGTH: Medium: 79 lines ILLUSTRATION: GRAPHIC: Illustration. color. Chart: Most common additions to aby CNBhome, 1994. color.