In this MSN Money column, Betsy Schiffman thinks investing the tax refund in ahome improvement plan is the best use of the money. (The column is derived from a similar Forbes article by Betsy herself.) The article is focusing on the potential tax savings and how to qualify one's home improvement project for certain savings.
While I certainly think putting money on home improvements is better than spending on a Maui trip, I don't think the aforementioned tax benefit is meaningful for most people for several reasons:
First, as correctly mentioned in the article, the first $500,000 capital gain associated with a home sale is usually tax free. In other words, one can only expect a tax benefit from his home improvement project if he will be able to sell his property $500,000 more than what he paid for. With the national average home price at around $170,000, most of the ordinary homeowners may not see any tax benefit out of those home improvement efforts. (Disclousre: My house is currently valued at approximately $320,000, and I never think I will be able to sell it for more than $820,000 in my lifetime. I will be lucky if I can sell it for $500,000 in ten years.)
Second, the moment one completes such a permanent home improvement project, the local tax authority may increase the assessed value of the property. The result: before you see any potential tax benefit a number of years down the road, you start to pay a higher property tax every year. (Check out this CNN Money article on this.)
Third, one cannot expect to recoup 100% of the remodeling cost from the increase in property resale value. According to Remodeling Online's 2003 Annual Cost vs Value Report, one can only expect to recoup most of the cost on deck addition, side replacement and bathroom addition. Expect to only recover 75% of the cost for kitchen remodeling and master suite.
So, my rational taking is one should not think too much of tax benefits when it comes to home improvement. The justification to start a new remodeling project should come more from family needs rather than anything else.