Home Repairs VS Improvements: No Clear Answer

Question: I am having trouble figuring out what constitutes an improvement and what is ordinary maintenance. Thinking ahead to selling my house in a few years when the market rebounds, I have been keeping accurate records so that I can deduct these costs to lower the capital gains. Recently, I remodeled a bathroom, replaced a deck, replaced and upgraded the spa filter and motor, replaced the front door with a fiberglass model guaranteed to last more than my lifetime, and replaced a roof and rain gutters. Which of these can I safely regard as improvements, and which are just maintenance?

Answer: The line between repairs and improvements is fuzzy. The Court cases that have analyzed this issue are all over the place, with Judges deciding the exact same work going in opposite directions.

If your property is a rental, then in most cases you want to call the work a repair. Repairs can be deducted as rental expenses in the year that you pay them, thereby reducing your rental income. But discuss this with your tax advisors or your accountant first.

If this is your principal residence, however, while you obviously want to keep your house in good repair, the moneys you spend on ordinary maintenance provide no taxable benefits for you.

Improvements, on the other hand, may be very valuable to you when you sell your house, since they increase the tax basis in your house. The higher the basis, the less tax you have to pay.

Let's look at this example. In 1985, you bought your first house for $100,000, and sold it for $200,000 in l990. That same year, you bought another house for $200,000. Prior to l997, an important tax break for homeowners was called the "roll-over". Although you made a profit of $100,000 when you sold your first house, you did not have to pay any capital gains tax. Instead, the profit was "rolled-over" into the new house. The basis for tax purposes of the second property became $100,000.

You now want to sell, and have listed your house for $700,000. You know that under the current law, since you are married and have lived in the house for two out of the five years before sale, you can exclude up to $500,000 of your gain. You do the numbers and think that because you bought the house for $200,000, and will sell it for $700,000, you are home free on any capital gains tax.

Wrong: since you took advantage of the old "roll-over", your basis was $100,000, and when you sell it for $700,000, you will have made a profit of $600,000. While you can exclude up to $500,000 of this gain, you will have to pay capital gains tax on the $100,000 difference. Currently, the tax rate can be as high as 20 percent, so you will have to send a check to the IRS in the amount of $20,000. You may also have to pay the applicable state tax.

For purposes of this discussion, I am not taking into consideration other expenses which you have paid, such as closing costs, real estate commissions, or legal fees. These expenses will, of course, reduce your overall tax obligation.

How can you increase your tax basis? Here is where improvements play a vital role. Any work which you do to your house that adds to its value, prolongs its useful life or adapts it to new uses (such as "going green") will be considered an improvement and can be added to the tax basis of your property.

Let's take your examples: 

remodeled your bathroom: since this clearly prolongs the useful life, it is an improvement; 

replaced a deck: this is a grey area. According to the IRS, "a repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life." (IRS Publication 527, "Residential Rental Property" (available free from www. IRS.gov/publications). Since you can claim that the new deck will increase your property's value, I would consider it an improvement.

replaced and upgraded spa filter motor: although it sounds like a repair, since you upgraded the motor, I would consider this an improvement.

replaced the front door: clearly an improvement, since the new door has a very long useful life.

replaced roof and rain gutters: the IRS publication specifically addresses rain gutters, and states "fixing gutters" is a repair. But since you replaced your gutters, once again you are in a grey area. However, since you replaced the roof (which clearly is an improvement), and had to remove the gutters during this process, I would call the entire job an improvement.

The IRS publication contains a list of "examples of improvements" but cautions: "Work you do (or have done) on your home that does not add much to either the value of the life of the property, but rather keeps the property in good condition, is considered a repair, not an improvement."

If your profit will be less than the exclusion of gain ($500,000 for married couples; $225,000 for taxpayers filing a separate tax return), then it probably does not make a difference whether your work is a repair or an improvement.

However, for those who bought and sold homes before l997, and used the "roll-over", and for those whose property values increased dramatically in the early part of this century, improvements will assist you in reducing your capital gains tax obligations to the IRS.

By Benny L. Kass, Realtytimes.com Courtesy of Premier Homes. When you are buying or selling property in today's market, it's important to have confidence in your Real Estate professional. Our commitment as your REALTOR® is to provide you with the specialized Real Estate service you deserve. When you are an informed buyer or seller, you'll make the best decisions for the most important purchase or sale in your lifetime. That's why our goal is to keep you informed on trends in Miami Real Estate. With property values continuing to rise, Real Estate is a sound investment for now and for the future. As local Broward & Miami-Dade area experts with knowledge of the communities, Premier Homes objective is to work diligently to assist you in meeting your real estate goals. If you are considering buying or selling or would just like to have additional information about Real Estate in your area, please don't hesitate to call 954-600-8739,visit our website, or e-mail info.premiersouthfloridahomes@gmail.com

Is It Really Easier to Get a Mortgage These Days? Well…

This was supposed to be the year that getting a mortgage would become easier. Now that we’re halfway through, we’ve seen home sales and closings substantially improve over last year, including by first-time buyers. This must mean that access to credit is getting better, right? Well, it doesn’t look that way.

After mortgage backers Fannie Mae and Freddie Mac clarified their credit qualification standards last fall to encourage lenders to ease their requirements, it seems like credit access would improve. And then the Federal Housing Administration lowered its insurance premiums, and Fannie and Freddie introduced new low-down-payment programs for qualified buyers.

Looking at the year’s data through June, closings of existing homes are up 8% over last year. And a greater proportion of those buyers had taken out a loan: The share of closings that were all-cash transactions in June was 22%, down from 32% last June.

Meanwhile the share of closings represented by first-time buyers, who are most dependent on credit access, has improved modestly from 28% to 30% this June, and mortgage purchase applications are up approximately 19% over last year.

This sounds good, but when we look at data specific to mortgages, they’re inconclusive. The Mortgage Bankers Association’s Credit Availability Index was at 122 in June, up 5% from June 2014. Before you think that a 5% improvement over last year is an impressive expansion of credit, consider the fact that the index peaked at 869 in June 2004. While no one would suggest that an index of 800 was, in any way, a risk-appropriate level of credit availability, 122 is clearly far from normal.
 
Looking for evidence

I took a spin through useful stats on approved and denied mortgages from mortgage software company Ellie Mae to see if I could find any evidence of looser credit standards or even any insights to help today’s buyer who may be struggling with getting approved for a mortgage. I did not find evidence of easier credit access.

The average FICO score on a closed purchase mortgage in June was 727. That average has remained between 724 and 742 for the past 24 months. In the past year, it’s been stuck between 726 and 732. Across mortgage loan types, credit scores haven’t moved much in the past year—they remain solidly of high quality and represent above-median credit-quality households.

Meanwhile the average denied FICO score has moved a bit. In June it was 672, down from 686 last June. What does that mean? More lower credit-quality households are applying but not getting approved. Yet at the same time, the percentage of purchase applications making it to closing has risen from 64% last June to 69% this June.
 
Times are still tough for those with tarnished credit

This would suggest that at least from a credit score perspective, it’s predominantly consumers with high scores who are applying. Researchers from the Urban Institute reported this spring that borrowers with anything less than pristine credit were having a hard time getting a mortgage. It would seem that their observations are still correct.

Borrowers will find more flexibility on FHA mortgages, where the average FICO score on closed mortgages in June was 689. However, that score was up slightly from the average score of 683 last June.

The data from Ellie Mae also show that loan-to-value ratios, measuring the loan amount relative to the home purchase price, are unchanged on average, despite more options available this year for low down payment loans, which would result in a higher LTV. The average LTV on FHA mortgages closed in June, for example, was unchanged from last year at 95% (representing a loan with 5% down).

There is still hope for borrowers who do not quite fit this credit quality mold. The July Senior Loan Officer survey data from the Federal Reserve indicated that banks have slightly eased lending standards for a number of categories of mortgage loans over the past three months. As a result, we should start to see that affecting the closing averages in the months ahead.

The one mortgage type for which the most banks have reported an easing of standards is the jumbo (both the conforming and nonconforming). So if you are a higher-income buyer looking for a mortgage to buy a home priced above the conventional loan limits, you will likely have more flexibility.
 
The outlook

The strong demand we’ve been seeing all year leading to substantial increases in home sales represents no deterioration in loan metrics. The improving job market and efforts by households to save and improve their credit scores are enabling them to get approved for mortgages.

This is all good, right? Not exactly.

Today’s limited credit availability is at least partly to blame for the tight supply that’s leading to higher prices and higher rents. Builders are not convinced that there’s enough depth of demand to absorb higher levels of new construction, so they are holding back and focusing on their profitable growth instead. Meanwhile, a substantial percentage of today’s homeowners with mortgages underwritten years ago fear not being able to qualify for a new mortgage today, so they stay on the sidelines and keep their homes off the market.
 
Article on Realtor.com
Courtesy of the Lina Arbelaez Real Estate International Group.

When you are buying or selling property in today's market, it's important to have confidence in your Real Estate professional. The Real Estate International Group’s commitment as your REALTOR® is to provide you with the specialized Real Estate service you deserve.

When you are an informed buyer or seller, you'll make the best decisions for the most important purchase or sale in your lifetime. That's why The Real Estate International Group’s goal is to keep you informed on trends in Miami Real Estate. With property values continuing to rise, Real Estate is a sound investment for now and for the future.

As local Broward & Miami-Dade area experts with knowledge of the communities, The Real Estate International Group’s objective is to work diligently to assist you in meeting your real estate goals.

If you are considering buying or selling or would just like to have additional information about Real Estate in your area, please don't hesitate to call 954-600-8739, visit our website, or e-mail info.premiersouthfloridahomes@gmail.com