How will you finance the project?
Especially if you’re taking on a larger project, it may make sense to finance it by borrowing against the value of your home or your investment securities through a home equity line of credit (HELOC) or loan management account (LMA). An LMA is a secured line of credit that uses your investments as collateral. It’s a way to leverage the value of your investments without withdrawing them — that way you can continue to pursue growth and potentially make progress toward other important financial goals, like retirement.
“It’s a good idea to check in with your financial advisor to weigh your options and talk about how the costs might affect your other goals,” says Marie Imundo, director, Wealth Management Mortgage Strategy and Execution, Bank of America. Some of the considerations your advisor can help you think through as you consider your financing options: The interest on a HELOC may be tax deductible, as long as it’s used to substantially improve your home. While the interest paid on an LMA isn’t tax deductible, the application process is simpler and, because your investments remain in place, they can potentially continue to grow in value. In both types of loans, you draw only as much as you need, when you need it, and by borrowing rather than selling investment assets (another option you might consider) to pay for the renovation, you’re able to avoid any capital gains taxes a stock sale could create.
Can you write off the cost on your taxes?
The money you’re saving by working from home — no commute, no takeout lunches or happy hours with coworkers — might just cover your monthly payments on a loan. But don’t count on a big home-office tax deduction, says Vinay Navani, CPA and shareholder at WilkinGuttenplan.
First of all, only people who are self-employed are eligible. “W2 employees can’t take the deduction,” Navani says. Secondly, the office space can’t be used for anything besides work to qualify. And even then, the payoff likely will be small: The cost of certain permanent improvements must be amortized over 39 years, and you generally can write off only a small percentage of your regular home expenses, such as real estate taxes and mortgage interest.
“Most of my clients decide the home-office deduction isn’t worth the hassle,” Navani says. “Where you can get bang for your buck, though, is office equipment.” As long as you’re self-employed, you may be able to deduct the full cost of work gear, a printer with a scanning function, or a stand-up desk.