house blue sky 2 - vorakornIt’s a much different picture renovating a home in 2008 than in 1998. Fueled by huge gains in the price of real estate, homeowners a decade ago were tapping home equity with little care since prices were expected to keep climbing, more than covering the cost of such improvements.

Today, with the slowdown in real estate and the widening damage in the subprime loan market, home prices are stagnant in most markets – and falling in others. Lenders tend to be a lot choosier these days about who to do business with. You need to make the most of home renovations. So before considering a project, it makes sense to make sure your financial house is in order:

See what kind of payoff your renovation will have:

During the housing boom, people thought virtually any renovation would offer big returns. That wasn’t true then, and it’s particularly untrue now. Take the time to figure out what renovations have the best chance for return on investment now – go to Remodeling magazine’s annual Cost vs. Value report online (http://www.remodeling.hw.net) and check 2007 project cost averages for your region of the country. In this market, renovate because it’s going to bring you comfort or pleasure, not because you’re expecting immediate profits.

Know how long you’ll need to stick around:

When you sell, remember that most married couples can exclude from their taxable income up to $500,000 of gain and most individuals filing single or married filing separately can exclude up to $250,000. You must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is generally applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.

Beware the bump in property taxes:

The great thing about a more valuable home is the potential higher value when you sell. The bad thing is a visit from the county assessor – more valuable property tends to lead to higher tax assessments. Make sure you not only can afford the cost of renovation, but also the higher taxes if your home is reassessed.

Make sure your renovation makes your home salable:

A discussion with a real estate agent or someone familiar with the value of improvements in your immediate neighborhood can tell you what will add to value or take it away. For instance, a big addition can take away from the value of a home if it is not aesthetically in tune with the rest of the neighborhood. Obviously, any renovation that keeps your house on the market longer better be worth it now because it might damage your sales prospects later.

A portion of this article was produced by the Financial Planning Association and provided as a courtesy by Perspective Financial, a local member.