Q & A With America’s Real Estate Professor: Home Renovation Upgrades
Home Renovation Upgrades
Q. We are planning on selling our home in 4 to 6 months and we want to know what upgrades to our home will improve the value and selling price of the home, so as to add profit on our sale? Jenna M., Lorton, Va.
A. Great question! Most upgrades will improve the value of your home, but generally none of them will add profit to your sale. Here’s the reality of home improvements; while any upgrade should increase the value and sales price, generally speaking the value increase from those upgrades will not be more than how much money you spent on those improvements.
Using numbers, you might spend $20,000 on a kitchen upgrade, but it will only improve the value/sales price of the home $15,000. Or you might spend $30,000 on a pool, which might only increase the home value $5,000. Of if you put in all new flooring for $12,000, it might only improve the sales price $10,000.
That’s how you could spend money and not get your money back on the sale from those improvements. Some improvements like just cleaning up the yard, painting ugly areas, and basic touch up, clean up and repair will make the house look nicer and probably help your value quite a bit. But in general, it’s usually best to let the new buyer spend their money on any big improvements.
An owner should make improvements to a property if they plan to live there and enjoy the improvements for a long, long period of time. If you’re not going to be the one to enjoy them, save your money and let the new homeowner decide what improvements work best for their living situation.
Taxes and Converting Personal Residence to Rental Property
Q. I’m moving out of my home and will rent out and keep it as a rental. I know I need to do a Federal Income Tax Schedule E going forward, and I understand that, but how do I calculate my “depreciation basis” and expense since I bought it years ago. Mike M., Tacoma, Wash.
A. I’ll provide the basics, but you need to work with a tax professional to work through the exact issues for your property.
When you own a rental property, you take the cost you paid for the property, like $200,000, split that cost between the “relative market values percentages” of the land vs. the building, like 40 percent land ($80,000) and 60 percent building ($120,000), and that $120,000 of the cost is your depreciable basis. So use the cost you paid and the percentages, not the market value (unless it is worth less than you paid, see below). Now you divide that $120,000 depreciable basis by 27.5 and your depreciation expense is $4,363 per year ($120,000 / 27.5 Years). This is how it works if you just buy a property as a rental.
If you’ve lived in it for years as a personal residence, as you have, there are a few other issues. You still stick with the original cost of the property – not the current market value – and divide that cost by land/building and depreciate the building cost. However, if the market value is now less than the cost – which for folks who bought properties in 2004-2008 it might be, you need to use the current market value as the basis and split that between land and building. So that’s a bit more confusing and that’s why you need a professional.
Also, if you made improvements during your home’s use as a personal residence – like a new kitchen for $30,000 – you can put that onto a new depreciation schedule over the useful life of that improvement, like 10 years, and depreciate that separately from the structure. Maybe to the tune of $3,000 per year for 10 years.
Get some professional guidance either way, and hopefully those basics will give you some good questions to ask that professional. Good luck!
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com
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