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Get a tax break for home improvement

Real Estate Tax Talk

 

In today’s down market, many homeowners are reluctant to pour more money into their homes. Before deciding whether to replace a roof or merely patch it, homeowner’s should consider the tax implications.

Home improvements — a new bathroom or kitchen, for example — can increase the value of a home and reduce any taxes due on the profit earned from its sale.

Home repairs provide no immediate tax benefits to a homeowner. They are not tax deductible and they are not added to the home’s basis (cost), for tax purposes. As far as taxes go, they are a nonevent. Thus, a homeowner who patches a leaky roof gets not tax benefits.

Home improvements are very different, though. The cost of an improvement is not deductible, but it is added to the home’s basis for tax purposes. For example, the cost of adding a new roof to a home is added to its tax basis. This reduces any taxable gain when the home is sold.

Of course, a substantial amount of gain is usually tax free, anyway, under the home sale tax exclusion: $250,000 for single homeowners and $500,000 for married owners filing jointly. But homeowners with substantial equity can still benefit from an increased tax basis in their homes.

For example, if Joe and Jane purchased their home in 1990 for $250,000 and it is now worthy $1 million, they will have a $750,000 gain. A full $500,000 of this amount is tax-free because Joe and Jane are a married couple and qualify for the tax exclusion.

But this leaves $250,000 subject to taxation. If Joe and Jan had spent $250,000 adding improvements to their home, they would have no taxable gain. This is because the $250,000 is added to the home’s original $250,000 basis, providing an adjusted tax basis of $500,000.

As a result, their gain on the sale would only be $500,000, not $750,000; and this entire gain would be tax-free because of the $500,000 exclusion.

So how do you tell the difference between an improvement and a repair? Here’s the basic rule provided by the Internal Revenue Service: A repair keeps a homeowner’s property in good operating condition but it does not:

-Materially add to the value of the property
-Substantially prolong its useful life, or
-Make it more useful (see: Treasury Regulations, Subchapter A, Section 1.162-4).

In contrast, an improvement adds to the value of a homeowner’s property, prolongs its life, or adapts it to new uses.

The problem with this definition is that virtually all repairs increase both the value and useful life of the property being repaired. The key difference between a repair and an improvement is that a repair merely returns property to more-or-less the state it was in before it stopped working properly. The property is not substantially more valuable, long-lived, or useful than it was before the need for the repair arose.

In contrast, an improvement makes property substantially more valuable and/or long-lived or useful than it was before the improvement.

You need to compare the situation before and after you made the expenditure involved. Have you just returned your property to the state it was in before the need for the repair arose? Or, have you made it much better?

If the answer to the first question is “yes,” you’ve repaired the home. If the answer to the second question is “yes,” it’s a home improvement.

Good examples of repairs include repainting a home, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows. Examples of improvements include adding a deck to a home, a new bathroom, installing a new heating system, or putting on a new roof.

Next week we’ll discuss how homeowners can make sure that the IRS will view their changes as home improvements rather than repairs.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.

   

via inman.com

“IN HER PRESENTATION at An Event Apart in Atlanta, GA 2011 Sarah Parmenter discussed how principles from human psychology can reframe how we think about Web Design. Here’s my notes from her talk:” An Event Apart: Crafting the User Experience.

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Top 10 real estate markets by share of new-home sales

CoreLogic: 9 out of 10 metros are in the South

Editor’s note: In compiling the “10 Best Markets for Real Estate Investors” report, Inman News reached out to a range of data providers and online real estate sites that supplied statistics and charts to identify real estate markets that may be well-suited for investors. The following chart and accompanying methodology were provided by real estate information and analytics company CoreLogic.

Top 10 Markets for New-home Sales Share (2010)
Metropolitan Statistical Area	New-home Sales	Total Sales Total	New-home Sale Share
El Paso, Texas	2,425	9,701	25.0%
Raleigh-Cary, N.C.	3,580	16,975	21.1%
San Antonio-New Braunfels, Texas	6,891	35,407	19.5%
Charlotte-Gastonia-Rock Hill, N.C.-S.C.	3,860	20,512	18.8%
Austin-Round Rock-San Marcos, Texas	5,831	32,088	18.2%
Jacksonville, Fla.	3,909	22,749	17.2%
Des Moines-West Des Moines, Iowa	1,446	9,154	15.8%
Charleston-North Charleston-Summerville, S.C.	1,464	9,622	15.2%
Oklahoma City, Okla.	3,019	21,017	14.4%
Nashville-Davidson-Murfreesboro-Franklin, Tenn.	3,380	25,342	13.3%

Source: CoreLogic.

Methodology:

CoreLogic sorted the markets with the highest share of new-home sales. The analysis was performed on 2010 annual data for the top 100 markets with the most sales.

It’s very well-known that there are a lot of distressed markets and which markets they are. There is much less information on which markets are doing well. But instead of choosing performance, CoreLogic chose new-home sales, because if a market is near the top for new sales share then it’s most likely doing relatively well.

As you can see from the list, it’s middle-tier or large cities in the South that missed the boom and bust and are doing fine. The only exception is Jacksonville, Fla. — CoreLogic found some articles showing the new sales market there doing well. It might reflect a large influx of people coming into the city, which definitely had been the case prior to 2008.

Source: CoreLogic.

Read the full report: “10 Best Markets for Real Estate Investors.”

A practical business guide to developing a Digital Marketing Strategy

So What is Digital Marketing?
Businesses face many challenges when it comes to marketing on the internet. From the dynamic rate of change on the web to the multitude of different suppliers offering various online marketing services, tools, and platforms, and the sheer volume of information online available on the subject all mean it’s becoming very difficult for businesses to make informed decisions about how to market their business on the internet.

On top of all this we have the jargon to contend with; PPC, SEM, SEO, CPA, PPC, CPC, CMS, wiki, blog, mash-ups (you know I could go on). You might have a good understanding of what all this means if you are active in the internet marketing world, however if you are a typical managing director (or even a  traditional marketing manager)  this is highly likely to completely confuse you. This post attempts to discuss a business focussed approach to marketing on the internet and key steps involved in developing an internet marketing strategy or a digital marketing strategy as it’s becoming more commonly known.

The Changing Nature of the Internet
So the web is growing (yes I am stating the obvious) and the growth statistics are staggering. The ‘Build it and they will come’ philosophy has never worked when it comes to websites and while that message has taken a long time to permeate the business world another myth has arisen – ‘facebook it’ and they will come’. The hype around social media has now led many business to believe that there is a panacea of traffic and customers they can access by simply ‘getting involved’ with the big social media sites. This is again myth and while the evolution of the web has opened up great new opportunities and new routes to market for businesses the reality is you need to act smart to get results and acting smart online means you need to be more well informed than ever.

The way the web works has changed. New web technologies have made it possible for non technical users to interact with the web in all sorts of ways and this interaction is what we typically call ‘social media’ a term which actually does a pretty poor job in defining the range of interactions happening online from business chat, support channels, consumer feedback, reviews, online video, blogs etc.  It’s not just about the big social networks. As these levels of interaction go up, the volume of content online is increasing exponentially and there are many ways to access information in many different formats.

Google and Digital Marketing
This change in the web has led a myth that search engine rankings (Google Rankings) are no longer as important as they once were and ‘social media’ interaction should be the main focus of online marketing. While you do need to look wider when planning your internet marketing efforts,  Google is still an absolutely fundamental piece of the puzzle and actually still the best place to start when thinking about marketing on the web. Sure there are lots of Facebook users but if you think about where you typically go online when looking for a product, product review, researching a topic etc then Google is still the main starting point for most web journeys. Just by looking at the Google search results these days you can see how they are blending in video, blogs, news, social results etc thereby putting their search engine right in the centre of multiple content channels and acting as a conduit to the ‘social web’. Their social search – functionality takes this one step further by personalising user search results based on their social network connections.

Online Market Research
The research phase of online marketing is possibly the most important yet probably the most overlooked step in most online marketing efforts. It’s important for business to understand the landscape they are trying to compete in before entering into a space online. The outputs from an online market research exercise should  include all kinds of information, from data on how people search for related products and services, data on specific keywords and key phrases used in search, profiles of web properties associated with target markets, Industry sites, blogs, forums, social groups and so on. This is what I would call the digital profile for a market . Once this has been mapped out the next stage becomes much clearer

Online Market Research  – Practical Steps
Simply think like a user/customer – Start with Google and start searching on keywords and key phrase related to your business/products etc and focus on your user journey. Take note of the type of sites which are ranking and also the types of content (video, blogs, forums, shopping feeds results, social results etc). After a while you will find most of the highest ranking (high authority) sites in your market as well as the sort of content which seems to rank such as video content and so on. Use the sidebar on Google to break down results into different types of content (blogs, discussion etc) and see what ranks in these sub sections, click on related searches to help you brainstorm different keywords related to your market etc.

Keyword Research – Use the  Google Adwords Keyword tool to get some real Google data on how often terms are actually searched for on Google.

Social Media Analysis – There are  lots of specialist social media monitoring/analytics tools available but you can learn a lot by just exploring what others are doing on social media sites. Check your competitors presence on Facebook and sign up to follow them on Twitter. Look out for best practice. You will know what best practice is when you see active user engagement. It’s not about the numbers of fans/followers its about how engaged they are.

Competitor Analysis – Use sites like Alexa, Semrush and Compete to get great data about competitor sites, ranking details, demographics of visitors etc. There are advanced paid options with most of these sites/tools but free versions still give you lots of good data.

More advanced toolkits are available from reputable companies such as the excellent Seomoz toolkit which I use myself and the Hub Spot products which are also very well regarded.

Digital Marketing Activity
So once your company better understands its space online and has done the ground work on online market research, competitor research etc. the next step, in theory is simple. You want to put your business, your products and your key messages right in front of your target customer audience. This means you want to rank on Google for the main keywords you have researched and you want your content to be placed on many of the relevant sites and web properties that you found when you were running through your customer journey  exercise. All of this can be summarised by the following phrases – ‘Develop great content and do very smart things with that content’ . The video below explores what this might involve in terms of what needs done on your website and what you need to do off-site (interaction around the web, social media etc).

Signs of a real estate microclimate

Mood of the Market

You might have heard a real estate commentator, analyst, or even broker or agent utter a relatively recent addition to the real estate lexicon, the adage that real estate is hyperlocal. It is usually used to indicate that all markets are not the same, and do not operate in the same direction at the same time.

This was the basis for the widespread belief that it was impossible to have a nationwide real estate recession, because markets are so different.

While that was clearly an overgeneralization, it is the case that we’ve seen different markets hit their peaks and troughs at different times and to widely varying degrees, based on the peculiarities of their local market. Las Vegas homes have lost about 60 percent of their value since their peak, while homes in Pittsburgh have lost less than 1 percent of their value, on average.

That’s hyperlocal.

Nature offers an interesting parallel to this real estate phenomenon: microclimates. Wikipedia defines a microclimate as “a local atmospheric zone where the climate differs from the surrounding area. The term may refer to areas as small as a few square feet (for example, a garden bed) or as large as many square miles.”

An urban gardening book I just reviewed defines microclimates as “small areas that experience their own weather conditions,” and goes on to explain that even in your backyard, “there are tiny climates that are each affected by sun and wind exposure, soil type, and houses, fences and other landscape features.”

Slopes, proximity to water, trees, buildings and a variety of other elements might cause, for example, weeds to grow more quickly in one area and snow to melt more slowly in others.

The San Francisco Bay Area, where I live, is well-known for its microclimates: It’s usually about 10 degrees warmer in Oakland than it is in San Francisco, and another 10-15 degrees warmer by the time you drive 20 minutes inland to Pleasanton.

As I planned my kitchen garden, I took some time out to consider all the various features — from the creek at the top of my yard, to the olive tree at the side, to the various slopes — that create the microclimates around which I should plan my plantings.

And, as always, my mind wandered to the parallel real estate question: What creates real estate microclimates?

I came up with a relatively short list of factors that cause a neighborhood, city, county or state to have its own real estate environment that operates independently from nearby areas or the national market at large:

Jobs: Areas that are job centers and have major employers in the area, with low unemployment rates and current or projected job growth, have different real estate market dynamics than other markets, largely because people want to buy homes where jobs are.

Universities: College-town real estate tends to be recession-proof compared to other towns, as towns anchored by one or more large universities tend to have a relatively steady and robust economic center and a constantly replenished demand for housing both for sale and for rent, in the form of students, faculty and staff members, and the workforce of the businesses that support the school(s).

Population booms: Districts that are experiencing an uptick in population — whether by birth or by incoming migration — also often experience their own real estate microclimates. It may come as a surprise that there are many cities and states in the U.S. that are actually experiencing net population decreases, as people move out for various reasons, including lack of jobs and affordable housing. Again, it’s all about demand.

Overbuilding: Where homes are vastly overbuilt, as they were at the top of the market in the Sun Belt foreclosure hot spots like Arizona, Nevada, Florida and some parts of California, a microclimate of oversupply can develop.

And there’s more — next week we’ll take a look at another set of elements within the ecology of an area’s economy that cause it to have an independent real estate market microclimate of its own.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.