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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Financing improvements for
resale
Dear Dr. Don,
I have an existing mortgage of $85,000 on a home
that I will sell in two years to relocate. The existing note is at
6.5 percent and only two years old. To get a good selling price on
my home of about $150,000 I will need to do updates and painting that
will cost about $10,000. I also have a note to pay off that is $18,000.
This will bring me to total financing of $113,000 before I sell.
Should I refinance the whole amount
or just use a home equity loan to cover the $28,000 over my existing
note. Any tax advantages that would make a refinance or just taking
home equity the better choice?
Thank you for input,
Larry Leverage
Dear Larry,
Your ability to use the mortgage interest deduction on your
income taxes when borrowing using a home equity loan or new first
mortgage depends on the fair market value of your home reduced by
the outstanding current mortgage. IRS
Publication 936, Home Mortgage Interest Deduction, provides
more details.
In general, money spent on repairs doesn't change
your cost basis in the home, but money spent on improvements will.
IRS
Publication 523, Selling Your Home, has more information.
The chart below is from that publication and lists some examples
of improvements:
With such a short horizon until you plan to sell
this home, it makes more sense to use a home equity line of credit
(HELOC) or a home equity loan to tap into your home's equity. That's
mostly because of the high closing costs associated with a new first
mortgage. Home equity loans typically have much lower closing costs.
-- Posted: Aug. 25, 2003
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