How to Strategize and Budget for Home Improvement

When you finally buy your home, you’ll likely be eager to infuse it with your own style and personality. That might mean painting rooms to match your tastes, ripping out carpet to make way for new floors, or an all-new kitchen. You might even want to do it all at once.

That can feel overwhelming, and it can also be financially draining. A strategy to organize and prioritize your home improvement projects can help. Here are a few things to keep in mind as you navigate the process.

Take a breath
While you might want to make lots of changes to personalize your home ASAP, also keep in mind that you’ve just spent what was likely the bulk of your life savings on a down payment, closing costs, and moving expenses. Before diving into major home improvement projects, it might be wise to take some time to build back your savings and regain your financial footing.

Don't ignore major maintenance needs
That said, you don’t want to put off issues that need to be addressed right away, like leaky pipes or anything that might be a safety hazard like a broken step. Your home inspection should have turned up anything big during the closing process, but being a homeowner means always expecting the unexpected. Plumbing, electrical, or other issues can crop up at any time, and some problems can’t or shouldn’t wait, because they could become bigger ones down the road.

Fortunately, many larger plumbing and HVAC outfits will allow you to pay off big projects—like a new hot water heater or heat pump system—monthly for a period of time without interest. Big box home improvement stores like Home Depot also offer loans and credit cards.

Keep your receipts
It’s important to document both your repairs and improvements. If it turns out something’s not right with the work performed, it will be handy to have your receipts for reference. But another potentially more important reason is when it comes time to sell your home, having those receipts can save you a lot of money.

When you sell your home, the difference between how much you paid for it and how much you sell it for, is called a gain. Many sales will qualify for a $250,000 tax exclusion for individuals, or $500,000 for couples filing jointly. In other words, if the gain is more than $250,000, you may need to pay taxes. (This assumes the price increases—losses are not tax deductible).

But if you made significant improvements and you kept good records, you can add the amount you spent to the original price of your home (a number known as your tax basis), which could decrease your gains and allow you to pay less taxes.

For example, if you buy your home for $400,000 and sell it for $700,000, your gains would be $300,000. If you qualified for the $250,000 exclusion, you’d need to pay taxes on $50,000. But if you spent $100,000 on improvements, that would bring your gains down to $200,000, which would put you below the tax threshold.

Improvements versus repairs
Keep in mind that the IRS gives credit for so-called  improvements but not repairs. Improvements can include adding a swimming pool, bedroom, or heating and cooling system. Examples of repairs include painting, fixing leaks, or patching holes in walls. In the IRS’s words, improvements “add to the value of your home, prolong its useful life, or adapt it to new uses.” But the difference can get murky, so it could be a good idea to enlist a tax professional.

Choose energy efficient upgrades
When the time comes to upgrade your appliances or heating and cooling system, clean energy or energy efficient options can help you qualify for tax credits as well as rebates. Solar energy or heat pumps are two examples of efficient energy sources that could help you save money on taxes. Learn more about tax credits here or consult your tax advisor.

Deciding what upgrades to address first in your new home can be challenging. It’s not always easy to choose between what you need to do versus what you want.

But it’s important to keep in mind how repairs and improvements will affect your taxes and the future value of your home. And with any project, be sure to get multiple estimates, and make sure any contractors you choose are qualified, have good reviews, and are insured.

Sources: Investopedia, IRS, Nolo, Smartasset