Many home-owners – especially young ones – still think that they can make money by buying homes, renovating and trading up periodically. There continue to be many arguments for and against this strategy. In support of this strategy is the concern about the future of the principal residence exemption – the rule that exempts the appreciation of one personally-occupied residence per household from capital gains taxes. Home renovations could increase the adjusted cost base of the property in some cases; meaning that renovations could reduce capital gains taxes if the principal residence exemption is changed or rescinded.
Contrary to this renovation strategy is the oft-forgotten yet inevitable costs of selling a home which can be estimated at roughly 10% of the value of the home. These costs of sale typically include: realtor fees (5 – 6% of the home’s value), legal and other fees as well as the actual costs of moving. Historically, home values have increased with inflation despite the perception that home prices outpace inflation. At the current inflation rate of 2% per year, it would take just under 5 years to recoup the costs of selling the home; threatening the utility of this buy, renovate and trade-up strategy.
