Keep Track Of Fix-Up Expenses

Mar 21, 1993

Bob Bruss

Tribune Media Services Inc.

Q By June I hope to have my home fixed up so it will be ready to sell, since I can no longer afford the mortgage payments because my ex-husband split, leaving me with two children and no child support or alimony payments. Thankfully, he signed over the house to me, so I can sell it. But it needs painting, new kitchen cabinets and appliances, landscaping and a new roof. I recall you wrote a long time ago about how to deduct these expenses on income-tax returns. Please explain again.

A: Don't confuse home sale fix-up costs with capital improvements. When preparing your principal residence for sale, you can subtract fix-up costs, such as painting, from your home's gross sales price as a selling expense, if the cost is incurred within 90 days before signing the sales contract and paid for within 30 days after the closing. Normally, these home fix-up or repair costs have no tax significance, since they are personal living expenses.

The only time home sale fix-up costs will save you tax dollars occurs if you buy a less expensive replacement principal residence. Then the fix-up costs reduce your taxable profit.

However, most of the items you listed are capital improvements which add to your home's market value or extend its useful life. Therefore, their cost should be added to your home's adjusted cost basis, thus reducing your sale profit. For full details, please consult your tax adviser.

Q: The last few months I have especially enjoyed the questions about home foreclosures. I went through mortgage default problems in 1991, when a job layoff, plus illness, cut my income dramatically.

At first, my mortgage lender was nasty and unsympathetic. But when I stopped making payments, I was quickly contacted by a "problem-resolution officer." He was tough, but when I explained the situation and I couldn't pay, he became more reasonable. We finally agreed in writing I would list the home for sale and the lender would (1) not report anything negative to the credit bureaus and (2) accept the net amount after selling expenses as payment in full. As a result of the lender's reasonableness, the lender only lost about $3,500, I kept my good credit rating and the lender didn't incur any foreclosure loss except the $3,500. Why don't you suggest this alternative to homeowners who can't make their mortgage payments?

A: That is an excellent idea which more lenders should accept. But too many lenders refuse to cooperate with borrowers, resulting in huge foreclosure losses for lenders and bad credit reports for borrowers.

For example, many lenders have an ironclad rule they will not accept a deed in lieu of foreclosure. That is stupid. When a borrower can't make the mortgage payments and offers the lender a deed in lieu of foreclosure, lenders should check the title to be certain there are no junior liens, such as for judgments or mechanic's liens. If there are none, then a lender should accept the deed in lieu of foreclosure, since that is much less costly than foreclosure for the lender.