Remodeling to Stay or to Sell Follows One Tax Basis Rule, and the Exclusion Tests Frame the Sale

Remodeling to stay and remodeling before a sale add to the home’s tax basis in the same way, and the home sale exclusion tests apply when you sell, so ask a tax professional how a project affects your sale and ask lenders for written loan estimates. This is general information and not tax, legal or financial advice, and Good Haus is a free matching service and not a contractor or a lender.

How does a remodel affect the tax basis?

The Internal Revenue Service says in Publication 523 that improvements add to the value of your home, prolong its useful life, or adapt it to new uses, and that you add the cost of additions and improvements to the basis of your property. The rule is the same whether you stay or sell, so ask a tax professional how the cost of your project would be added to your basis and what records to keep.

What do the home sale exclusion tests say?

The IRS says you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. It says you meet the ownership test if you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of the sale, and the use test if you and your spouse owned the home and used it as a residence for at least 24 months (2 years) of the previous 5 years. Ask a tax professional whether you meet both tests for the date you may sell, because a project before a sale does not change them.

How could you pay for each route?

The Consumer Financial Protection Bureau says that with a home equity loan you typically borrow all the money up front and then repay it in regular monthly payments. It says that with a cash-out refinance you replace your existing mortgage with a bigger mortgage and take the difference in cash, and that often you have to pay closing costs. Ask each lender for a written estimate of the payment and the closing costs, and ask how a sale in a year or two would affect the loan.

What if you might sell in a year or two?

Picture an owner who plans to sell within a few years: the project adds to the basis either way and the exclusion tests are about how long the home was owned and lived in, so ask a tax professional to run both routes and ask your lender how a sale would affect the loan before you request quotes.

What should you ask before you choose a route?

1. Ask a tax professional how the project cost affects your basis.
2. Ask whether you meet the ownership and use tests.
3. Ask each lender for written estimates.
4. Ask how a sale would affect the loan.
5. Ask each contractor for dates for each phase.

Put the Tax and Loan Questions in Every Plan Before Quotes

Settle the tax and loan questions with a tax professional and your lender before you ask contractors for quotes, then give every contractor the same project description and the same request for dates, so the bids compare the same work.