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Spruced up? Please make a note of it

Improvements can reduce capital gains when it's time to sell.

March 28, 2004|Michelle Hofmann | Special to The Times

Even though Uncle Sam places limits on tax breaks and incentives for homeownership, equity-rich owners can raise the bar by using permanent improvements to reduce capital gains tax liability at sale time. But that's not usually the motivation behind such projects.

Karen and Justin Pleasant of Fullerton thought replacing their badly cracked concrete driveway and adding curb appeal would provide a good return on investment. The cost of the improvement, however, will also offset their tax liability when they eventually sell, should their profit exceed $500,000.

The tax code allows homeowners to add the cost of many improvements to what was paid for the home, called the cost basis of the house -- the starting point for the Internal Revenue Service to determine capital gains.

Current capital gains tax exclusions allow married homeowners who have lived in a primary residence for two of the last five years to receive the first $500,000 in profit tax-free. The exclusion for single homeowners is $250,000.

Regular home repairs and maintenance don't count in determining tax basis, explained Jeffry F. Seaton, a Valencia-based certified public accountant who also has offices in Beverly Hills. What does count? Permanent capital improvements that prolong the life of the house, such as replacing a driveway or roof; that increase the value, such as an addition, landscaping or exterior remodeling; or that adapt it for a new use, such as turning an unfinished basement into a recreation room.

For home sellers whose profit falls within the exclusion limits, keeping track of what was spent on improvements won't matter.

"But if you bought something in 1945 for $20,000, and you're selling it for $1 million," Seaton said, "you want to add everything you've done for the last 59 years to your cost basis to reduce the capital gain."

The Pleasants are among those for whom saving careful records of expenditures will probably pay off when they sell the home. "We paid $190,000 for it," Justin Pleasant said of the couple's 1983 purchase. "Comparable homes in the area are selling for $600,000 to $700,000."

Plucking ideas from a variety of home and garden television shows, the Pleasants replaced the driveway and the steps leading to their four-bedroom, three-bathroom home, added low-level lighting throughout the newly landscaped garden, fitted a lamppost near the front door and installed a fountain.

Justin Pleasant thinks the $20,000 face-lift sets the home apart from its block mates: "It's made a world of difference to the view from the curb."

Of the now-and-later benefits of home improvement, personal enjoyment is frequently a driver. Simple touches, such as adding exterior lighting and ornamental trees, to major renovations and additions can change the entire look of a home, dramatically enhance curb appeal and make better use of space.

Americans are expected to spend $224 billion on remodeling this year, up from $214 billion in 2003, reports the National Assn. of the Remodeling Industry in Des Plaines, Ill. Harvard's Joint Center for Housing Studies estimates that will amount to about 25 million owners undertaking some type of home improvement project.

But it's not just recent improvements that can help offset taxes. Any improvement that is still part of the home at resale can be added to the basis as long as records are kept.

After losing a battle with the ground cover in front of her 1960s tract home, Granada Hills resident Charlotte Amborn and her neighbor replaced the dichondra with an elegant brick courtyard and two concrete driveways with brick ribbon accents. She also added several large trees, including a 50-foot sycamore, and a series of inviting brick steps, planters and benches. The 60-foot area has become a regular gathering place for neighborhood potlucks and barbecues.

Because the 1990 makeover added value to the property, Amborn's $13,000 expenditure will provide a boost to the home's basis when she sells. Amborn, who paid $35,000 for the house and estimates its value today at $700,000, has no immediate plans to move. For now, she is enjoying her yard's simple maintenance and clean look.

"When you own a home for 37 years," Amborn said, "you have to keep up with the times."

Nearby, neighbor Jerry Puchlik, an architect and president of Pasadena-based Puchlik Design Associates Inc., has heightened front rooms, installed high-efficiency windows and raised the entryway of his four-bedroom, 1960s ranch-style tract to transform it into a California contemporary.

Unlike a simple landscape project, Puchlik's 20-square-foot addition required filing a construction permit with the city and increased his property taxes. However, Puchlik said the addition of a designer window above the newly installed front door showcases the hallway chandelier and gives the hilltop residence, which sits at the center of a cul-de-sac, the warm glow of a lighthouse at night.

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