Four ways to be financially smarter during your renovation

With tax season approaching and money on the mind, we’ve got a few tips on how to be smarter and savvier with your finances when planning major changes to your home.


Money, like many things, is tricky business. And for as frustrating and complicated as finances can be, there’s no escaping that our world runs, for the most part, by the hand of capitalist systems. Long gone are the days where barter was the transaction of choice, and most people aren’t running their bank account via a potato sack of cash, unless they live in a cartoon.

Given the alacrity with which money moves and regulations change, it’s always wise to keep up with best practices when it comes to your dollars and cents.

It goes without saying that when you’re making a major investment, you’re going to want to be as financially savvy as possible–to avoid overpaying for work, being incorrectly taxed, and so on. It’s one thing, perhaps, to overpay a little bit on that really nice cup of designer coffee. But when we’re talking about hundreds of thousands of dollars on a project like a major home renovation, you’re going to want to get smarter about your spending. Mistakes, unfortunately, can be costly.

 

Be your own tax advocate

 

There’s that old saying, attributed to Ben Franklin, that goes, “In this world nothing can be said to be certain, except death and taxes.” A little grim, but also a little wrong! In the world of home renovation, the homeowner is not responsible for paying a sales tax on every line item.

Let’s take a step back for a moment. In order to understand what is taxable and what isn’t, let’s talk about capital improvements.

A capital improvement is the result of permanent work done in the home that increases its intrinsic value. So if you’re including bespoke cabinetry in a kitchen renovation, that’s a capital improvement. If you’re updating the HVAC system, that’s also a capital improvement. But if you’re buying an expensive washing machine, sorry! Anything that can be carried from the home does not fall into the category of capital improvements.

When you’re looking at financial documentation from your general contractor, like an estimate or an invoice, there are two places where you should not see sales tax applied:

 

Capital investment labor

 

New York tax code stipulates that a homeowner will not pay a sales tax on the labor required to do work for projects categorized as capital investments.

 

Capital investment materials

 

Your general contractor is already paying sales tax on materials used in capital investments. But given that the sales tax was already included at the point of sale between the general contractor and the material vendor, you should not see an additional line item for sales tax in your estimate. Your line-itemed expense, instead, should be all-in, including the raw cost, sales tax, and contractor markup.

Any contractor worth their while should know the tax implications of their work–but so should you, as the homeowner. If you see an additional line item for sales tax where it doesn’t belong, speak up! (Or maybe find a new general contractor.) 


 

Get a certificate of capital improvement and understand the tax implications

 

The certificate of capital improvement documents the permanent and value-adding work completed in your home during renovations. You should fill out the Form ST-124 no later than ninety days after completion and return it to your general contractor for tax purposes, as sales tax is not charged on the labor required for capital improvements.

To get a little more in the weeds, let’s talk about the capital gains exclusion after the completion of work. Here’s a handy breakdown of the tax implications if and when you sell your renovated home–after it has appreciated in value and you’ve lived in the space for at least two of the five years prior to the sale.

Without making it overly complicated, capital improvements lessen the taxable amount of your home's capital gain (or value appreciation) during the sale. Investopedia provides a handy example with real numbers, to help illustrate what we mean here, because you might be thinking...um, what?

 

"Assume, for example, a person purchases a home for $650,000 and then spends $50,000 to renovate the kitchen and add a bathroom. The cost basis of the home, therefore, increases from $650,000 to $700,000. After 10 years of owning and living in the home, the homeowner, who is single and files his taxes as such, ends up selling the property for a price of $975,000. If no capital improvements had been made, the taxable amount for the capital gain would have been $75,000, derived as $975,000 (sale price) - $650,000 (purchase price) - $250,000 (capital gains exclusion). However, because the capital improvement increased the cost basis by $50,000, the taxable amount for the capital gain would be $25,000, calculated as $975,000 - ($650,000 + $50,000) - $250,000."

 

Before you go shopping, consult with your general contractor

 

Once the renovation is underway, there’s all sorts of materials and appliances that will eventually find their way into your home. A new fridge! Beautiful windows! Three types of tile!

Finding and purchasing the things that will literally create your new home is fun and exciting–but we’d advise you chat with your contractor before putting down your credit card. Why? Most savvy contractors have preferred relationships with vendors and can purchase items in bulk, resulting in lower costs. At Bolster, we like to manage the entire procurement supply chain, soup to nuts, so that we can equitably share savings with our homeowners.

 

Radical transparency is key
 

When you’re investing so much into something as important as your home, it’s critical to know exactly where your money is going. (You’re not going to want to see a line item on an estimate that simply says “labor,” for instance.) To that end, your contractor’s estimate should be as detailed as possible. We’ve got a primer on what to look out for here.

 


 

If you’re considering a major home renovation, and you’re ready to make the investment, we hope you’ll get in touch. We’ve got the financial chops to ensure we deliver radical transparency and accountability during the entire process, as we work to manage the entire supply chain–from every nut and bolt to every can of paint. We’re talking about dollars and cents that make a whole lot of sense.