Tag Archives: Albuquerque Real Estate

Did You Sell Your Home After Making Improvements?

Keeping track of the cost of capital improvements to your home can really pay off on your tax return when it comes time to sell.

By:  for HouseLogic

It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.

Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.

The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

What Counts As a Capital Improvement?

Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.

Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.

There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.

There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement.

One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.

How Capital Improvements Affect Your Gain

To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.

Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the  15% tax rate on capital gains. Well worth taking an hour a month to organize your home improvement receipts, don’t you think?

The top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.

Watch Out for These Basis-Busters

Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.

  • If you use the actual cost method and take depreciation on a home office, you have to subtract those deductions from your basis.
  • Any depreciation available to you because you rented your house works the same way.
  • You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received.
  • If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

Home Loan Interest Rates Decline

How is the market???

Everyone wants to know, apparently. Some people, perhaps out of kindness, follow that question up with something that goes like this, “I mean, are you selling houses???”

But what we suspect most home owners are yearning to find out is what the local pricing trends are doing so they can have some idea of what their home value might be doing.

Well, unfortunately, the annual report from the realtor association has yet to surface. However, we’ve included a graph below that shows home prices over the last decade in Albuquerque, which is interesting and surely worth a look. If you’d like to know specifically what a home, any home, is worth, we are happy to do a market analysis for you upon request. There is never a fee for this, it’s what we do, and do well. So while we wait impatiently to post a write-up about the market based on the annual report, we’d like to shed some light on some good news about interest rates.

Many people have attempted to predict for years now when the helium balloons of interest rates will be untied, sending rates floating skyward until they reach more normal levels again or (gasp) perhaps until they reach 1980’s levels (plus 10%, ouch!) And last year, interest rates did go up a little, to 4.5%. Many** people thought rates had seen their best days behind them. But near the end of the 2014, as gas prices eased and we found ourselves fueling up two tanks for the previous price of one, interest rates followed in the same downward trajectory.

In early December, rates fell below 4% and the current rate on a 30 year fixed is now 3.8%! This is only the second time since John Kennedy’s presidency that the rates have been below 4%, and that’s pretty exciting whether you’re thinking of buying or selling. While we can’t count on the cost of rent, food, healthcare or education to be fixed for the next 15, 20 or 30 years, we have the opportunity to secure a house payment that is.

Albuquerque Home Prices
Albuquerque Home Prices

In early December, rates fell below 4% and the current rate on a 30 year fixed is now 3.8%! This is only the second time since John Kennedy’s presidency that the rates have been below 4%, and that’s pretty exciting whether you’re thinking of buying or selling. While we can’t count on the cost of rent, food, healthcare or education to be fixed for the next 15, 20 or 30 years, we have the opportunity to secure a house payment that is.

Albuquerque real estate listings for locals, by locals (505) 263-2973