Many a homeowner will be happy to learn that the Internal Revenue Service has clarified confusion on how home equity loans will be treated under the new tax plan. According to the IRS, the interest paid by borrowers on home equity loans, HELOCs, and second mortgages will still be deductible, but only if the money is used to "buy, build or substantially improve" the taxpayer's home that secures the loan in question.
There are other limits on the home equity loan interest deduction. A borrower may only deduct the mortgage interest on a total of $750,000 in loans, whether the loans are first mortgages, second mortgages, or home equity loans.
National Association of Realtors president Elizabeth Mendenhall welcomed the IRS clarification. "There has been much confusion on this issue, and the continued deductibility will bring real benefits to those who choose to take on remodeling projects to bring more resale value to their home or gain equity that may have been lost during the downturn."
Remodeling activity is currently at an all-time high. The Residential Remodeling Index by Metrostudy ended the fourth quarter with an index of 111.3, an annual increase of 4.9 percent. The index has had 23 consecutive quarters of annual gains since 2011 and is projected to reach new highs through 2020. Spending on home improvements and repairs is projected to increase 7.5 percent this year.
"Our economy is robust, with job and wage growth and high consumer optimism. With the housing shortage and rising home prices, more homeowners are choosing to remodel their homes instead of moving and buying a new home," said Bill Moody, president of the Silicon Valley Association of Realtors.
Exterior remodeling projects that enhance a home's appearance continue to return the most money as a percentage of cost. Findings from the 2018 Remodeling Cost vs. Value Report, published annually by Remodeling magazine, compares the cost for 21 popular remodeling projects to the amount the projects recoup when the homes are sold. The value of home improvements can vary from city to city and even neighborhood to neighborhood.
In the San Jose area, all but three remodeling projects offered more than a 100 percent return on investment. The project expected to return the most money, with an estimated 233 percent of costs recouped upon resale, is manufactured stone veneer. Lightweight stone veneer costs about $9,000, is easy to install, and creates good curb appeal.
At an average cost of $3,759, replacing a garage door is estimated to have a return value of 208.2 percent. A grand entrance (fiberglass) came in third, with an estimated return of 161.3 percent.
Other projects that scored high were a minor kitchen remodel (148 percent), wood deck addition (146.5 percent), steel entry door replacement(124.6 percent) and siding replacement (124.5 percent). Receiving the lowest estimated returns for the money spent were adding a backyard patio (79.5 percent) and an upscale master suite addition (82.1 percent).
Moody said Realtors can provide insight on what types of home improvement projects would be of value because they see hundreds of homes every year. Realtors know what types of projects are permitted and regulations in your particular area, and whether a project is worth undertaking.
"Consider how long you plan to live in your home and the number of years left on your mortgage before you decide to undertake a big project. Some projects may not appeal to the average buyer and may affect the resale value of your home. If you plan to undertake a big project, consult with your Realtor," said Moody.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.