Personal Business


Ready to Renovate? Keep an Eye on Taxes

August 17, 2003

Hollie Craig knew that it would be difficult to leave her friends, family and the open countryside in Nokesville, Va., when her husband, Jeff, took a job in Cincinnati two years ago. But the couple quickly found a new home, a colonial-style house on three acres, enough space for their horses and for Mrs. Craig to continue her work as a trainer and riding instructor.

The Craigs started building a 40-by-60-foot horse barn soon after they moved in. They remodeled the house, too, adding about 2,000 square feet of living space. They loved all the improvements - and so, it seemed, did the local tax assessors. When the construction was completed, their property tax bill doubled, to $16,000 a year.

"We were assuming our taxes were going to go up," Mrs. Craig, 43, said, "but I had no idea they were going to double."

As many municipalities struggle to balance budgets, their tax officials are more than happy to hear about home improvements and the increase that they usually mean for assessments. The strong real estate market, which has raised home values, has helped to fatten tax coffers as well. Nationwide, property tax collections rose nearly 7.5 percent in the 12 months ending in March, versus the same period last year, according to the Census Bureau.

"Assessors are always under a great deal of pressure to round up, especially in times of budgetary crunch," said Peter J. Sepp, a spokesman for the National Taxpayers Union in Alexandria, Va.

Depending on a local government's assessment schedule, properties may be reassessed as often as every year or as infrequently as every 10 years, or only when a property changes hands. But making major improvements to a home can prompt an almost immediate reassessment. Some governments, however, have more resources than others and may be better prepared to enforce the rules.

Some projects are more likely to make an assessor take notice; the tip-off is usually the building permit, which you or your contractor must get for some projects. In many communities, every time a permit is issued, a copy lands on the assessor's desk.

"This is an easy way to get an additional jump up in the tax valuation," said Richard Roll, president of the American Homeowners Association in Stamford, Conn. "Rather than waiting for a general revaluation, they are going to be able to put you in a comparable class of houses." If you add a second bathroom, for example, your home may be automatically placed in a higher category for assessment purposes.

Adding a bedroom, garage or fireplace will inevitably require a permit, Mr. Roll said, but so can some minor projects. Permit requirements can vary greatly from town to town. Concord, Calif., requires building permits for adding skylights, sliding glass doors, replacement windows or attic fans, while Hallandale Beach, Fla., requires them for sheds or satellite dishes. In Tacoma, Wash., a permit is required for paneling a room. Other projects may require permits if they exceed standard dimensions, like fences more than 6 feet high or decks more than 30 inches above grade.

"Even towns right next to each other, they can have abutting borders and different rules," said Clive Ebsen, owner of Rainier Construction and Remodeling in Tacoma.

It is best not to dodge getting permits, because there may be legal consequences if you are caught working without one, Mr. Ebsen warned. Aside from protecting your investment and the public safety, having the work approved in advance means that the building inspector won't require you to tear down that new wall, for instance, to show him the plumbing.

Not everything that requires a building permit is automatically assessed, according to contractors. Repairs and maintenance, like fixing a roof, replacing a hot water heater or modernizing electrical wiring, should not affect a valuation. Neither should new ceilings or walls, replacing porches or steps or repairing original siding.

"Utilitarian things are not looked upon the same as the 'wow' things," said Joseph Dellanno, president of Design Solutions, a residential design company in Arlington, Mass. "If it's not as flashy to the eye, then the assessors don't really look at that as 'You improved that, so I'm going to get you on that.'"

Many improvements rarely require permits. "You can cosmetically improve your home quite substantially, improve its curb appeal and improve its aesthetic livability without causing an increase or attention to your current property taxes, and for many people that's the best way to go," said Mr. Roll of the homeowner association.

Outside the house, improvements will not only increase the value of a home, but also often lead to a quicker sales. Without worrying about tax implications, homeowners can typically repair concrete walks and driveways, replace gutters and downspouts, replace exterior awnings and shutters and paint a house from top to bottom. Adding or upgrading landscaping, including lawns, shrubs, trees and flowers, has been shown to increase selling prices, and is usually not on an assessor's checklist.

Be wary, though, of a Cinderella-style overhaul: doing many repairs and cosmetic improvements all at once may prompt a reassessment. Adding a gazebo or a small shed is usually a tax-free endeavor, but some yard accessories are not. Leo A. Martineau, owner of LCM Remodeling in Merrimack, N.H., knows one homeowner whose property taxes rose after a modern gas grill in its own platform was installed on the patio. "It takes a three-quarter-inch gas line to run," he said. "You could feed half the city with that thing."

Kitchen and bathroom improvements, which can recoup a high percentage of their construction costs when a house is sold, do not have to be big productions, either. Do-it-yourselfers can replace cabinet fronts or countertops, change the flooring, retile the backsplash and update the lighting fixtures without the need for a permit, according to contractors. (Feel free to get rid of the avocado green dishwasher for a new stainless steel model, too. "Most appliances are considered mobile, so they are not going to tax you on it," Mr. Martineau said.)

When it comes time for a local government to reassess properties in your neighborhood, it may never know about the new tile and sink in the bathroom. Donald Kelly, a spokesman for the Appraisal Institute in Washington, says many local governments take a "mass appraisal" approach to estimating a home's value. "It means they work block by block, or square mile by square mile, community by community, and don't necessarily, or probably rarely, visit the property," he said. "People do things that never show up on the tax rolls because the assessors don't show up at the house."

Before a major project, homeowners should ask their local assessor how the change will be calculated. In some places, the assessment for a home addition is based on the extra square feet of living space.

In such cases, said John Bredemeyer, president of Realcorp, a residential real estate appraisal company in Omaha, homeowners may be able to use high-end materials because they will not affect the per-square-foot average.

"Normally the materials used to build an addition or put a roof on are going to be similar to other homes in the neighborhood," he said. "Unless somebody is doing something way outside of the norm, it wouldn't show up on the assessment."

If you need more space, consider converting an unfinished basement into an extra living area. Because the footprint of the house stays the same, the tax bite may be smaller than that for adding a first-floor room, contractors say. In fact, converting an existing space to a new use is almost always less of a tax burden than adding on.

When Janice and Van Berg, who own and operate Berg Construction in Roseville, Calif., decided to include a built-in hot tub in the home they were building for themselves, they chose to enclose the porch and to house it there. Because the porch is unheated, the tax rate is lower than that for the rest of their house. "That is taxed at three-fourths of what the living space is," she said.

When her husband needed a space for his hobby work, they built a small workroom in the garage. Because the room has heat and air-conditioning, they pay the full tax rate on the room, but the rest of the garage is taxed at a reduced rate of 50 percent.

Whatever the project, homeowners should avoid overrenovating. A fourth bathroom in a two-bedroom house may be unimportant to a potential buyer, but it can make the tax assessor take notice. The same goes for specialty projects, like swimming pools.

Some cities and states offer incentives for homeowners who renovate. In Washington State, homeowners can apply for a remodeling exemption that lets them avoid paying taxes on certain home improvements for up to three years. In San Jose, Calif., owners of historic properties who agree to keep them maintained and repaired receive a reduction in property tax rates.

Certain major improvements can be used to increase the cost basis, or original price of a home, which means that the capital gains tax paid after selling the home is reduced accordingly. Only people with expensive homes, however, will have to worry about that tax, thanks to the capital-gains exemption of $250,000 for single homeowners and $500,000 for married homeowners. (To qualify, you must own and use the home as your principal residence for two of the five years preceding the sale.) But tax experts still recommend saving all home improvement receipts in case the law changes again.

For many homeowners, the higher resale value and the thrill of shaping the house they have always wanted will outweigh the burden of a property tax increase.

"If I knew my taxes were going to double, I might have scaled back a little bit on a few things, but probably not too much," said Mrs. Craig, who spends much of her day in her new barn with the oversized stalls and Old English-style stable doors. "It's pretty much the barn of my dreams."

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