DEAR BENNY: Is the definition of "capital improvement" something that increases the actual value of the house, even if it may not trigger a change in taxes, or must it be taxable?

If the first, is there a dollar figure that could be considered a "floor"?

DEAR BENNY: Is the definition of "capital improvement" something that increases the actual value of the house, even if it may not trigger a change in taxes, or must it be taxable?

If the first, is there a dollar figure that could be considered a "floor"?

For example, when we bought our house we discovered many unsafe issues, such as no railings on steps leading down from the deck and, notably, unsafe steps exiting the house into the garage. We built a landing with better, safer stairs at the dangerous exit at a cost of about $400. Railings cost about $100. Our corrections have made our house safer, but they didn’t lead to a rise in taxes and they will not lead to an increase in sale price. Are additions directed to safety considered repairs or capital improvement? –Phyllis

DEAR PHYLLIS: That’s a good, but tough, question to answer. Many years ago, I did a study of a large number of court cases involving "What is an improvement?" My findings were simple: There is no easy answer. Some courts held the work was an improvement, while others looking at the same set of facts held it was not an improvement.

According to IRS Publication 523, Selling Your Home, "improvement" is defined as follows: "These add to the value of your home, prolong its useful life, or adapt it to new uses."

Oversimplified, to be considered an improvement, it has to have a useful life of more than one year. The IRS publication makes it clear that mere repairs (even though they maintain your home in good condition) are not improvements if they do not add to the value of your home or do not prolong its life.

Why is it important to have the work considered an improvement? Because an improvement increases your tax basis. For example, let’s assume you purchased your home for $300,000. You indicate that you built a better, safer landing at a cost of $400. I would argue that because your home is safer, it will increase the value of your house and thus is an improvement. That means that your tax basis will now be $300,400.

To determine profit, you subtract the adjusted tax basis from the adjusted selling price. Obviously, the larger your tax basis, the less profit you will have. For most homeowners, this is an academic exercise, because if you have owned and lived in the house for two out of the five years before it is sold, you can exclude up to $250,000 of gain and not pay any capital gains tax (or up to $500,000 if you are married and file a joint tax return).

However, as I write this column, Congress is facing the so-called "fiscal cliff." There is no guarantee that this exclusion of gain will remain on the books beginning in 2013. Stay tuned.

I do, however, recommend that you obtain IRS Publication 523 since it contains a laundry list of examples of improvements that increase basis.

DEAR BENNY: We recently purchased a house that was built in the 1950s. Since moving in we found out that the house has had settling issues and had work done to shore up the foundation a few years back. There are numerous cracks in the interior plaster walls (ceiling, above doors and windows, closets), some of which have been filled in and painted over, others that are open.

We had an inspection done by a property inspector, but none of these issues were mentioned in his report. I understand it’s an older home and as such will have some blemishes, but shouldn’t the inspector have at least brought this to our attention? –Andy

DEAR ANDY: Before I respond about the inspector, I want to ask you a question.

In many states, when a homeowner puts the house up for sale, the law requires some kind of disclosure. For example, in the District of Columbia, sellers must complete a fairly comprehensive report, listing areas that may have problems. In Maryland, however, sellers can either disclose or disclaim. The latter means that the seller is refusing to provide any information about the house, and the buyer is alerted to the fact that there may be problems that should be explored before closing the deal.

Does your state have any disclosure requirements? If so, did you get a disclosure report from your seller and were the items you have listed above disclosed? If not, you may have a case against the seller for failing to disclose.

Now, turning to the inspector issue: Once again, my answer must be general, since state law differs.

First, I strongly suggest that every person who is planning to buy an older home include an inspection contingency in the real estate sales contract. That means that you have X number of days (usually seven or 10) from the time you first sign the sales contract to have the house inspected by a professional, independent home inspector.

If you are not satisfied with the inspection results, your contract can spell out two different scenarios: (1) you can completely back out of the contract and get your earnest money immediately refunded, or (2) you can provide a list of items to the sellers for repair, and they can tell you what they will and won’t do. You then have the right to accept the house with the sellers doing certain work or cancel the contract.

By the way, I always prefer that buyers get a cash credit at closing (escrow) from the seller rather than have the seller do the repair work. All too often, sellers will hire unlicensed contractors to do a Band-Aid patch job; you are better off getting estimates on the cost of repair and getting a cash credit from the seller.

From my experience, most inspectors will have you sign a statement that says if you have problems with the inspection report or discover that the inspector missed something, the inspector’s liability is limited to the amount you paid him for the job. In law, this is known as an "exculpatory clause."

Courts will enforce such clauses, and thus even if you find that the inspector missed thousands of dollars of needed repairs, if you paid only $400 for the inspection, that is all you will get if you file suit.

However, courts have become more realistic. Often, the potential homebuyer will be asked to sign that clause after the inspection takes place, and this could be on the last day of the contingency. What alternative does the buyer have? If the clause is not signed, the buyer will not have time to find another home inspector, and thus will not be able to exercise the contingency and back out of the deal.

So, some courts have held that the clause is unenforceable, since the buyer was literally forced to sign — it was under duress.

Other courts have upheld the clause, but if the homebuyer can demonstrate that the inspector was negligent, then the inspector can be held liable for that negligence.

Because state laws vary, you should consult with local counsel as to your rights.

DEAR BENNY: I own a commercial space that a title (escrow) company rented. When they closed shop back in July, they left all the files as well. It’s a great "starter kit" for ID theft, and no one seems to care. I can’t help to think that everyone who went through that company would be a little upset knowing that their personal information could be compromised. –B.T.

DEAR B.T.: Yes, there is a lot of personal and financial information in settlement (escrow) files, including but not limited to Social Security numbers, bank account and credit card information, and phone numbers and email addresses.

You are an honest man, and I commend you for your concerns. I suggest you contact the company (assuming you can reach them) and tell them that they left a lot of personal, private information in your space, and that they can be sued for invasion of privacy should that information somehow leak out.

If you can’t reach that company, every settlement (escrow) company writes its title insurance through a national, licensed title insurance company. I suggest you contact that company and tell them the facts.

If all else fails, you should shred all of the documents.

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