A friend of mine bought a house a few years ago, and then accepted a job and had to move a year later. When he bought the house he took advantage of the $8,000 home buyers tax credit, but had to return that money because he didn’t stay in the house the requisite 3 years. In the year he was there, he renovated the attic from unusable into livable, finished space. The result was that the value of the home thus increased enough to offset the general slump in home prices and the cost of the renovations was tax deductible, so the whole thing was a wash, financially, even with having to return the original $8,000 credit. Good for him, he got lucky.
My first question, after hearing this story, was this. Why are home renovations tax deductible? This strikes me as a subsidy to people that don’t really need a subsidy. Sure, the value of your home is increased which is useful to you directly and to your neighbors indirectly, but what broader public interest does this serve? Why should the general public reimburse my friend for making his attic nicer? Is it the case that, by creating an incentive to remodel, we were hoping to prop up the construction sector? Or is he now on the hook to invite the taxpayers over for poker night? We’ll bring beer.
I’m not really sure what broad public policy goals are served by buying someone a new attic, so if anyone has any insights I’d love to hear them.
520 Chestnut 
The broad public policy goals are winning elections by pandering to a large voting block. These subsidies claim to increase access to home ownership and help the construction sector (more jobs, right?). They do help the construction sector, but mostly just by allowing construction prices to rise.
I suppose the argument might be something like this. “Subsidies in this area make it more affordable for homeowners to reinvest in their property, and property ownership is one of the cornerstones of a good, stable society.”
B.S.
The only possible rationale I can come up with, in terms of policy, for renovation reimbursement would be to promote renovation as a way of indirectly subsidizing construction. I see the logic (eh, ish) but I don’t think we should do it, or that it really would even be effective. I do think this one was probably more about subsidizing construction rather than promoting ownership. That being said, we also do way too much to promote home ownership.
At any rate, taxpayers shouldn’t buy people nicer kitchens. If the government wants to make sure some money makes it to contractors to renovate things, a much more effective (and useful!) way to do it would be to take however much money was budgeted for the tax credits and use it to hire those contractors to renovate government buildings. Better still, have them renovate public schools. Not saying this is what we should do, just that it would be a much better way of accomplishing what I am assuming is the goal of the renovation credit. At least in my scenario, the public can realize some benefit.
This may be tangential, but as far as I knew, the only types of remodeling things that were tax deductible were things that incentivized people to go green, save energy, & things like that. For instance, I got a new roof installed that was “green” & helped save energy…I could have (though I didnt’) written that off in my taxes. Also, some people may change out old windows for more energy efficient ones or get a better hot water heater or HVAC unit that promotes energy saving, and these types of things could possibly count as well.
As far as the attic is concerned, I don’t know exactly WHAT HE DID to the attic, but if there’s a chance a lot of those changes were eco-friendly and/or energy-saving, that could be why it was tax deductible.
…again…I may be off base, but that’s my humble .02.