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The Honolulu Advertiser
Posted on: Thursday, February 26, 2004

Home may cut taxes more than you think

By Deborah Adamson
Advertiser Staff Writer

Your house is not just a home, it's also one heck of a tax shelter.

"Owning a home, for most Americans, is the most important tax shelter and investment they can make," said Marilyn Gagen, a Honolulu certified public accountant and former president of the local chapter of the Financial Planners Association.

Aside from federal tax deductions, Hawai'i residents get breaks from the state ranging from credits for remodeling to installing solar energy panels. So whether paltry or palatial, your house can save you money. The trick is to be fully informed about what credits and deductions you can take.

For state tax, if you've remodeled your home and paid for it by the end of June 2003, you could be eligible for the residential construction and remodeling credit. It's 4 percent of construction and remodeling costs, up to $250,000, according to the state Department of Taxation.

So if you spent $20,000 by June 30 last year, you can get a tax credit of $800. Even if you continued remodeling past June, you can deduct only what you actually paid up to the end of that month.

You can't claim a credit greater than what you owe in taxes. You'll have to carry it over to following years. Also, only remodeling or construction expenses are allowed — work that boosts home value — not maintenance, such as fixing a few tiles.

If you installed solar energy panels, you get a maximum state credit of $1,750 for a single-family home and $350 for a condominium, co-op or townhouse in the tax year the units were bought and installed. For more information, call the state at 587-4242.

The best-known home tax savings is the deduction of mortgage interest from federal income taxes.

If you've refinanced your home, any points — loan origination fees — are deductible over the life of the loan. If you've refinanced several times, the points not yet deducted from the original loan are written off on the last year of the mortgage, Gagen said.

For example, if you paid $3,000 in points to refinance a 30-year mortgage in January 2000, your annual deduction from the points is $100, or $8.33 a month. Let's say you refinanced again in January 2003 with $3,000 in points for 15 years. Your yearly deduction is $200 or $16.67 a month. When you're filing taxes for 2003, you can deduct the $200 from the new mortgage, plus $2,700 for the remaining points from the old mortgage. (You've already used $300 of $3,000 in deductions from 2000 to 2002, leaving a balance of $2,700 as of last year.)

Remember that a tax deduction is not the same as a tax credit, which is a dollar-for-dollar subtraction from your taxes.

Let's say you owe $1,000 in taxes. A $200 credit lowers your tax bill to $800. A tax deduction, on the other hand, lowers the income on which you are taxed, and doesn't save you as much. If you get a $500 deduction and your tax rate is 28 percent, you save $140.

Property taxes are deductible from state and federal taxes, but owning a condo could lower your taxes even more. Your monthly maintenance fee might include property taxes on the building's land, in which case your portion is deductible.

If your condo building converted from a leasehold to fee simple, the owners collectively bought the land. So you can deduct the interest not only on your unit, but also for the mortgage on certain common areas, Gagen said.

However, special assessments or fees charged for projects such as fixing the elevators are not tax deductible. Those expenses can be added to the cost basis of your home, however, which would lower your taxable gains if the house is sold at a profit.

Most homeowners know mortgage interest is deductible from state and federal taxes, but fewer realize it's applicable also on a second home, home equity line or home improvement loan up to $100,000, Gagen said.

Moreover, military personnel with non-taxable housing allowances can still deduct mortgage interest and property taxes, according to the IRS, unless the mortgage balance is greater than $1 million ($500,000 for married couples filing separately) or the mortgage loan was used for purposes besides buying, building or improving the home.

If you're buying a home and haven't owned a principal residence in the past three years, consider the federal Mortgage Credit Certificate program. According to the Housing and Community Development Corp. of Hawaii, this tax perk allows you to take 20 percent of your mortgage interest as a tax credit and the rest as a deduction.

There are restrictions: An individual or family of two cannot make more than $78,240 in Honolulu and $74,640 in other counties. For a family of three or more, the income limits are $91,280 and $87,080, respectively.

Your home price cannot exceed certain limits, which are currently being revised upward. Most Hawai'i lenders participate in the program. For more information, call 587-0567 or visit www.hcdch.state.hi.us/mortgagecredit.html.

If you sold your home last year, you can exclude up to $250,000 in taxable gains if you're single or filing separately; $500,000 if married filing jointly, as long as you lived in the house for two of the last five years.

If your spouse dies and you sell your house in the same year, consider filing jointly as a married couple to qualify for the higher exemption.

If you bought a home, you may be able to deduct from state and federal taxes not only the points you paid on your home mortgage, but also points the seller paid. You have to reduce the cost basis of your home by the amount of the seller's points, according to the IRS. The seller cannot deduct the points, but they can be used to lower his or her gains on the sale of the house.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.