Overlooked Recordkeeping

Homeowners are familiar that they can deduct the interest and property taxes from their income tax returns. They also understand that there is a substantial capital gains exclusion for qualified sales of up to $250,000 if single and $500,000 for married filing jointly. However, ongoing recordkeeping tends to be overlooked. 38285944-250.jpg

New homeowners should get in the habit of keeping all receipts and paperwork for any improvements or repairs to the home. Existing homeowners need to be reminded as well, in case they have become lax in doing so.

These expenditures won’t necessarily benefit in the annual tax filing but may become valuable when it is time to sell the home because it raises the basis or cost of the home.

For instance, let’s say a single person buys a $350,000 home that appreciates at 6% a year. Twelve years from now, the home will be worth $700,000. $250,000 of the gain will be exempt with no taxes due but the other $100,000 will be taxed at long-term capital gains rate. At 15%, that would be $15,000 in taxes due.

Assume during the time the home was owned that a variety of improvements totaling $100,000 had been made. The adjusted basis in the home would be $450,000 and the gain would only be $250,000. No capital gains tax would be due.

Some repairs may not qualify as improvements but if the homeowner has receipts for all the money spent on the home, the tax preparer can decide at the time of sale. Small dollar items can really add up to substantial amounts over many years of homeownership.

You can download a Homeowner’s Tax Worksheet that can help you with this recordkeeping. The important thing is to establish a habit of putting receipts for home expenditures in an envelope, so you’ll have it when you are ready to sell.

Remodeling costs and Time

The one experience that homeowners can agree upon after completing a remodeling project is that it costs more and takes longer than expected. It doesn’t really matter that you researched, planned, and received multiple bids, it will, invariably, cost more and take longer than you originally anticipated.96303159-250.jpg

Replacing floorcovering or painting is a project that a homeowner can easily get bids and contract with the workmen directly. A new level of complexity occurs when the project involves more specialized contractors, like plumbers, electricians, carpenters, counters, and others.

Now, a homeowner is faced with dealing with one general contractor who will run roughshod over the sub-contractors or make the decision to do it themselves. Typically, you’ll pay more for a general contractor, but the trade-off is that they have the contacts and experience to make things go smoothly.

Subs are notorious for wanting to finish their “part” of the project and move onto to the next job. Sometimes, they’re not interested in the “big picture” enough to consider doing things in a way that are best for the overall outcome.

When you start tearing out some things, you find out that there may be unexpected expenses involved. Another common occurrence is that during the project, you get a new thought about changing something else “since it is already torn up anyway.” This will add time and money to the job.

There can be the situation that the homeowner doesn’t even know the right questions to ask or what to consider when trying to coordinate the different workers. The most detailed timetable can be thrown off track if one set of workers don’t show up or finish on time. At best, it delays the project for a few days. At worst, it can delay it for a few weeks because the individual workers may have committed to other jobs that don’t allow them to reschedule.

Once the work is done in a professional manner, you’re probably going to live with it for years. If it is something you’ve wanted to do and it will allow you to enjoy your home more, it is worth doing. Just be patient and enter this adventure with the understanding that it will cost more and take longer than you expect.