By Marshall Loeb, CBS MarketWatch

Last Update: 11:56 AM ET Oct 1, 1999 Personal Finance News

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NEW YORK (CBS.MW) --

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The kicker to major home improvements is the tax benefit. "The key word is improvement. The tax inspectors will not let you count normal repairs and upkeep." When you eventually sell your house, your expenses for basic improvements are added to the original price you paid for the home to create the so-called cost basis. For example, if you originally paid $100,000 for the house, and over the years you put in $50,000 in significant home improvements, your cost basis is $150,000. Say that you then sell the house for $225,000. You subtract the cost basis from the purchase price to calculate the capital gain. In this case, your capital gain is $75,000 -- that is $250,000 (sale price) minus $150,000 (cost basis) equals $75,000. Among the improvements that qualify to be added to your cost basis are new or improved rooms, decks, porches, fences, shrubs, trees, storm windows, lighting fixtures, central air conditioning -- even wall-to-wall carpeting, termite-proofing and waterproofing. Check out IRS Publications 523 and 530 for more details on what qualifies as basis. The key word is improvement. The tax inspectors will not let you count normal repairs and upkeep. Maintain full records of all your improvements and renovations. That way you can avoid having to guesstimate when the time comes to pay the IRS.

Financing the upgrades

To finance your home remodeling and renovations, consider taking out a home equity loan. The interest rate is usually adjustable, varying monthly, and pegged at around one percentage point above the prime rate. Lately the home equity rate has been relatively low -- about 9.04 percent -- and very important, it is tax-deductible on loans up to $100,000. A great benefit of a home equity line of credit is its flexibility. You take out money only as needed, and you pay interest only on the amount you write checks for. You can use the money for any purpose, not just home renovations. The home equity line of credit can run as high as 90 percent of the appraised value of your house, minus the unpaid portion of the mortgage principal. The average line that banks approve is $41,000, reports the Consumer Bankers Association. But you can get loans as high as $300,000 to $500,000, depending on the available equity in your house, your cash flow to support repayment, and your credit history. Repayment can be stretched out for 10 years or more. An estimated 15 million homeowners currently have home equity lines of credit. Lenders are eager for your business. You can get home equity lines of credit from banks, brokerage firms, savings and loan associations, credit unions, and some mortgage banking firms.