Tax information for Hawaii homeowners

Selling your principal residence

A single homeowner can claim up to $250,000 from the sale of a principal residence as a tax-free profit. A qualified married couple filing jointly in the year of a home sale can claim up to $500,000 tax-free profits.

To qualify, Internal Revenue Code 121 requires owning and occupying your principal residence at least two of the last five years before its sale. However, if you acquired your home in an Internal Revenue Code 1031 tax-deferred exchange and later converted it into your principal residence, for sales after Oct. 22, 2004, you must have owned it at least five years (but only two years of occupancy is required).

Buying your principal residence during the year

This is the best season to be a home buyer. If you can complete the title transfer by Dec. 31st, you will be entitled to deduct your home mortgage interest as an itemized deduction on your income-tax return.

Loan points are are tax deductible and generally reported on form 1098 along with your deductible interest.  Prorated property taxes and mortgage interest are also deductible.

TAX STRATEGY: What are your itemized deductions prior to a home purchase?

In constrast, purchasing earlier in the year allows for more interest to be paid on the mortgage and the same buyer may find he has $10,000 in interest, plus the $3,000 in points plus another $1,000 in real property taxes, for total itemized deductions of $14,000.  That's $8,650 in additional deductions that will save the homebuyer a lot of money in taxes.

TAX STRATEGY: Apply for a mortgage credit certificate

If you're a first time homebuyer or haven't owned real estate for at least three years, consider applying for a mortgage credit certificate.  The certificate allows a homeowner to take 20% of his mortgage interest as a tax credit rather than an itemized deduction.  There are several conditions the applicant should be aware of, read about them here.

Refinancing your home?  Make sure and deduct the balance of your loan fees.

Mortgage rates are coming down and you might be ready to refinance.   If you have any undeducted loan fee from a prior mortgage refi, you can deduct them in total when you refinance again.

Home equity loans up to $100,000 - interest is tax deductible.

Interest paid on a home equity loan up to $100,000 secured by your home is tax deductible, smart homeowners obtain a home equity loan credit line and use the proceeds to pay off non-deductible loans, such as auto loans, credit cards and student loans.

Most banks and other home equity lenders offer these loans, which are really second mortgages secured by your home, at the prime rate or lower.

Note: if you're trying to get a home equity loan that, in addition to the first mortgage is greater than the home's value, the IRS may limit your deductible interest.

Prepay your mortgage and property taxes

In December, consider paying your January mortgage and upcoming real property tax payments prior to the end of the year.  You will then be able to deduct the payments on your current year tax return.

Will a portion of your home sales proceeds be taxable?  Consider delaying closing in the new year.

This can be useful when the end of the year is getting near (late November and December).

If your principal residence sale capital gain exceeds the $250,000 or $500,000 tax exemptions, it will usually be best to delay your home sale until the following year. Then  you will have additional time to pay your capital gains tax on the home sale profit exceeding your exemption.

Tax deferred exchanges - Section 1031 for investment properties

To sell a business or investment property tax-free, consider making an Internal Revenue Code 1031 tax-deferred exchange. To qualify, you must acquire one or more "like kind" properties of equal or greater cost and equity.

Internal Revenue Code 1031(a)(3) approves Starker delayed exchanges. Sell your investment or business property, have the sales proceeds held by a qualified third-party intermediary or accommodator, and then use that cash to acquire qualifying property of equal or greater cost and equity. But you have only 45 days to designate the replacement property and up to 180 days to complete the acquisition.

Check with your tax advisor before making a decision

As usual, I must recommend that you use the info above as a guideline and consult with your own tax adviser for your particular situation.

• Mike Bates is a Hawaii realtor and CPA

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