Mechanic’s Liens & Releases
A mechanics lien is a legal claim on your property by a contractor or supplier who hasn’t been paid according to a legal agreement. Any licensed general contractor, subcontractor or supplier who’s involved in the improvement of your property can file a lien if they aren’t paid. It makes no difference whether it’s you or your general contractor who failed to make the payment-the lien will still be filed against your property. Liens are rare, but if you find yourself on the receiving end, it can make your life pretty miserable. If you try to sell your house, for example, even years later, an outstanding lien can make it impossible to close the deal.
If you’ve planned correctly, the contracts you’ve signed with your contractors will clearly state the payment schedule and the responsibility of the contractor and the homeowner, making a lien unlikely. However, in some cases, your receipts will be the only proof that you’ve paid for the materials and labor. Before making the final payment to any contractor, always get a lien release. A lien release, or waiver, is a legal document that confirms that the contractor has finished the work and has been paid in full for those services. If you’re using a general contractor, make sure you get lien releases from all subcontractors, as well as a final lien release from the general contractor before you make the final payment. A guide shows a sample lien release you can use as a model. If a contractor intends to file a lien, the law requires that Hrst you be notified in writing.
After informing you, the kitchen contractor is then allowed to file a lien with the county recorder, and must send a copy of the document to you. lf you find yourself served with a lien, here is what you should do:
1. First, determine if the claim is legitimate. Get out your receipts and canceled checks, and compare them against the contracts and invoices. If you have not paid money that’s rightfully owed, honor the commitment and pay the lienholder as soon as possible. Even if it’s your general contractor, not you, who has failed to make payments, you should still pay the subcontractor. Later, you can legally deduct this sum from the final payment you owe the general contractor.
2. lf for some reason, you can’t pay the money in dispute, or if you believe the lien has no merit, schedule a meeting with the contractor and try to work out an agreement. ln some cases, correcting a simple bookkeeping error can resolve the misunderstanding. lf you have deliberately withheld final payment because of unresolved problems with the contractor’s work, point this out and offer the contractor a chance to make good on the contract in exchange for your final payment.
3. lf a private meeting doesn’t resolve your differences, suggest that the case be referred to a professional arbitrator (if your contract doesn’t already have an arbitration clause). Professional arbitrators are familiar with these kinds of disputes, and their decisions are binding. Arbitration is almost always faster and cheaper than a court case.
4. If all attempts to settle the dispute fail, you can wait for the suit to be filed and plead your case before a judge. Just make sure you have copies of all contracts and receipts before you head into court. lf the sum in dispute is under a few thousand pounds, the case may be heard in small claims court, in which case you and the contractor can present your cases without lawyers. If the sum in dispute is larger, however, you’ll need to hire an attorney to represent you.
Taxes
A remodeling project can affect your tax burden in several ways – some good, some not so good. The tax laws are always changing, however, and you’ll need to consult a tax professional to get up-to-date tax information that applies to your situation when buying kitchens.
Property Tax
If your new kitchen adds substantial market value to your home, your city or county tax assessor may raise the estimated value of your home, and you’ll end up paying more in property taxes. Small projects that don’t alter the floor plan of your home will probably be ignored by the tax assessor.
Income Tax
lf you’ve financed the project with a home improvement or home equity loan or a second mortgage, the interest on that loan is probably deductible on your income tax. This applies only to the interest on loans secured by your home. Most taxpayers can’t take a direct deduction on the cost of the remodeling project. However, if you take a deduction for a home office, you may qualify for a deduction; check with a tax professional.
Capital Gains Tax
If you ever decide to sell your home and move into a property of lesser value, you’ll be subject to capital gains tax on the net profit you gained from the sale. However, you may be able to use the amount you invested in remodeling to reduce this net profit. For example, if your present home originally cost £100,000 and you sell it for £160,000, you’d be subject to capital gains tax on the £60,000 that you made on the sale. However, if you’ve spent £50,000 on a new kitchen, and you have the documents to prove it, you can add this amount to your original purchase price to increase the cost basis of your house. For tax purposes, then, your capital gain on the sale would be just £10,000.
Bear in mind, however, that some remodeling expenses can’t be used to increase your home’s cost basis. Repair and maintenance work, for example, isn’t considered a capital improvement. The cost of buying and installing new cabinets would be a capital improvement, but the cost of repainting or refacing your old cabinets wouldn’t.
Payment tips
Never make your final payment until you’ve inspected the work-even if the contractor is a good friend. Your contract should specify a final payment that’s at least 15% (and preferably 30% to 35%) of the total amount due to the contractor. This is your only leverage for ensuring that the contractor finishes the job to your satisfaction. Once you’ve inspected the work and are satisfied with the results, be sure to get a signed lien release when you hand over the final check. Some contractors are masters at talking homeowners into paying earlier than the contract stipulates. Don’t give in to this; under no circumstances should you pay in full before all the work is completed.
