No points for originality will be awarded to anyone currently thinking, “Gee, we can’t afford to move, so let’s remodel or add on to this place.” The amount of spending on such projects is set to double in 2013, according to a report from Harvard University’s Joint Center for Housing Studies. Homeowners are doing everything from retrofitting with the idea of aging in place to improving their homes’ energy efficiency. And some recent homebuyers or investors are finding that the distressed properties they now own will require some improvements, like it or not.
So, apart from their lack of originality, might home renovations be a good idea for you? Here are some issues to consider:
- How will you pay for repairs? If you’ve got cash on hand, great. If you’ll be looking for a loan, and are underwater on your current mortgage, don’t bother. You will need equity to borrow against — 25-35% equity in your home, according to what Mark Yecies, an owner of SunQuest Funding in New Jersey, told The New York Times reporter Lisa Prevost.
- Will the changes increase your home’s market value? In the abstract, any home improvement should make your house more saleable, unless it’s truly weird, wacky, or suited to unique tastes and interests. But even sensible repairs with broad appeal don’t always cover their own costs when the homeowner sells, as described in Nolo’s article, “Do Home Improvements Add Value?“
- Will the costs reduce your capital gains tax bill when you sell? If your profits on an eventual home sale will take you over the $250,000 ($500,000 per couple) capital gains tax exclusion, it’s worth figuring out which of your renovations costs are considered “improvements” rather than mere “repairs,” and therefore which ones will raise your cost basis in the property (in effect, raise your purchase price and thereby reduce your profit). For more information, see IRS Publication 551, Basis of Assets, and look for the section on real property.
If all looks good, it’s time to start looking for a contractor. But get ready for some competition and possibly long waits. See “Hiring a Contractor for Home Improvements” for additional tips.