Improving Your Home Can Bring You Some Tax-Free Funds Eventually
Philadelphia Inquirer Online (02/22/02) No. 56 p.40; Brown, Jeff

Prior to 1997, homeowners could receive tax-free sale profits only when buying a new house within two years of a sale and for more than the previous property's sale price. However, 1997 federal tax reform allows married and single homeowners to avoid taxes on profits up to $500,000 and $250,000, respectively, if they have resided in the primary residence for any two of the last five years. Riverwoods, Ill.-based tax-information firm CCH Inc. says the law makes exceptions permitting homeowners to count time in a nursing home or other facility, provided they lived in their house for at least one year. Furthermore, widowed homeowners may still claim the $500,000 tax break if they sell the same year that their spouse died. Allowing them to profit on the home's value at the time of their spouse's death--rather than the original sale price--usually slices the amount of payable tax. Home improvements that boosted property value previously prompted owners to purchase more expensive houses in order to qualify for the exemption, often forcing them to put their sale profits toward the new home instead of other investments. To benefit from the current law, homeowners should choose more profitable upgrades, such as in the kitchen or bathroom, that will help the property appreciate in value over time; swimming pools and professional paint jobs usually cost more than the value they add. Though major remodeling jobs--such as an addition--could drive up property taxes and minimize the tax-free gains on a future sale, the weakening stock market continues to make real estate a better investment.

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