Many of us have been spending more time than ever at home lately, and with all that at-home time, may have noticed a few shortcomings throughout the entire house. Things that we overlooked before are now glaringly obvious, especially when it comes to functionality. Some households now have two parents working from home, as well as schooling being done remotely. Finding areas to accommodate everyone can be a challenge. To address these concerns, many people are building home offices in their basements, designating specific locations in their living areas or bedrooms, and upgrading lighting, internet services, and more.
The Home Improvement Boom
Adding office space, building a deck, upgrading landscaping and kitchen renovations are all popular projects, and the pandemic has not slowed down the pace of home renovations. According to a recent U.S. Census Bureau report, sales at home and garden centers, hardware stores, and building supply stores have seen a year-over-year increase of 22.6%. Only the category of online sales showed a bigger year-over-year increase. According to Houzz, there was a 58% increase in request for home professionals in June 2020, compared to June 2019.
All of this is not surprising, given that many employers shut down, and non-essential employees were required to work remotely. Working from home has saved many employees on commuting time, and that has opened up a few extra hours for home projects. Plus, our surroundings impact our mental health. The pandemic has invoked increased stress in most individuals, and having a pleasant, functional environment can boost people’s mood. This effect increases when combined with the sense of accomplishment from a project well-done. Even a simple coat of paint and some organization and decluttering can make a huge difference.
Paying for Home Improvements
It may be difficult to find the funds to pay for improvements, especially if you have been out of work due to COVID-19. Some projects, such as painting and adding new cabinet hardware, are inexpensive. Others, obviously, can be quite costly. A popular way to pay for home improvements has always been a home equity loan or home equity line of credit (often referred to as a HELOC). Because interest rates have been low, a cash-out refinance or a HELOC are even more attractive options. While taking on additional debt is always something to be considered carefully, if your projects will increase your home’s value, then it may make sense. Another benefit of a HELOC in these uncertain times is the access to cash it provides, particularly for those who do not have a liquid emergency fund. If you are considering one of these options, do not wait. Some lenders are overwhelmed with applications to process right now, so get the ball rolling as soon as possible.
Tax Implications of Home Improvements
There may be tax implications if you borrow against your home. If you itemize, on your personal income tax return, a portion of the interest and real estate taxes may be limited. Fewer people itemized these last few years because of the $10,000 limit imposed on the deductibility of taxes and the higher standard deduction provided by the Tax Cuts and Jobs Act of 2017.
Under current tax law, home mortgage interest on debt up to $750,000 (or $1 million if the debt originated prior to December 16, 2017) used to purchase or improve your home (that includes your primary residence and a second home) is tax deductible. Home mortgage interest on debt that is not used for home purchase or improvements can no longer be deducted. Therefore, it is important to calculate your deductible vs. non-deductible interest if you itemize and have home mortgage debt that was used for anything other than home purchase or improvement. Keep in mind, these limits are cut in half if you are married filing separately. There are also other restrictions that may apply to your situation.
In addition, major improvements can add to the basis of your home and ultimately reduce the gain on the sale. If you are selling your primary residence, there is a gain exclusion of $250,000 for single and $500,000 for married filing jointly. There are different rules for gain on sale of rentals and vacation homes.
If you have any questions regarding the above tax issues and limitations, please call us at 401-921-2000, or reach us through email or complete our online contact form.