How Much Should You Spend to Improve Your Greatest Tax-free Investment?

Most people are conscientious about investments in stocks or mutual funds which generate taxable profits. Why then do homeowners pour money into in their greatest tax-free opportunity-their home-without investigating returns beforehand?

Some homeowners spend large sums on landscaping, adding a new garage, or renovating the interior. When it comes time to sell their home they expect that those investments in home improvement will be reflected in the sale price. However, too often homeowners spend far too much or they make improvements that indulge their personal tastes. It is only afterwards, when it comes time to sell that they discover whether those changes will actually add to the value of their home.

It is worth noting the differences between cost and value. Cost is the out of pocket expense of doing home renovations. Value is the actual market price of your property. At selling time, homeowners are often upset when their realtor shows them sales data on home values indicating they will not reclaim all the money they invested in upgrades.

If you have the urge to renovate you are not alone. Canadians spend well over $3 billion on materials and labour for renovations every year. Of the homeowners who did renovations in 1996, the average expenditure was $3,338.

One explanation for the home improvement boom is that Canadians are eligible for an income tax exemption on the profit, or capital gains, they make when they sell their home. (Revenue Canada's only stipulation is that the home must be the principal residence.) Since the profit you make on your home is tax-free, it pays to do some research to ensure you maximize your return. The proper renovations can make your home more liveable and more saleable.

In order to ensure that you recoup renovation costs:

• Find out what the maximum price range is for houses in your neighbourhood. If the renovations to your home increase the property value well above the maximum range for your neighbourhood, you will find it difficult to sell it for a price which will cover your costs. For example, if the market value of your home is $200,000, the maximum sale price in your area is $205,000 and you spend another $15,000 on renovations you will most likely lose $10,000. Ask a local realtor to search the Multiple Listings Service (MLS) database for the selling prices of houses in your area before you begin your renovations.
   
• Concentrate on cost-effective details when deciding which renovations to do. If you purchased your home during a peak price period choose only those renovations that address the most urgent and visible problems. Since a loss on your home cannot be used as a tax-deduction you cannot profitably do large-scale renovations.
   
  
• Ask for a market evaluation. Most realtors are happy to offer a free market evaluation. This is a great way to find out what your home is worth. The realtor may also be able to suggest those renovations which appeal to buyers.

Contact your local realtor and Revenue Canada to get a clear idea of the value/cost ratio of your projects. If you have done the research and find that the remodelling or renovation project you wanted to do is unprofitable remember there are also many minor renovations which are inexpensive and easy to do. Add a new coat of paint, trim the bushes, or hang new artwork. Like the saying goes imagination is free! As housing prices rise you can reconsider the larger projects.

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