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Tax Benefits Of Homeownership


Having a home to call your own is great on so many levels. Homeownership can mean fixed monthly payments over the long term, a sense of community with your neighbors, and a more stable environment for your keiki and family. When you’re a homeowner, you join the millions of Americans who enjoy significant tax benefits every year.

According to Alton Murakami, Vice President, Tax and Risk Manager at First Hawaiian Bank, the three most lucrative tax deductions related to homeowner-ship are mortgage interest deduction, real property tax deduction and exclusion of capital gains.

“I would say that for the average taxpayer who itemizes, the most valuable deductions likely have to do with home-ownership,” said Murakami.


Interest you pay on your mortgage — a substantial percentage of your monthly mortgage payment — can add up to thousands of dollars a year and is tax deductible, up to $1 million in mortgage debt for as long as you have a mortgage.

Murakami said prospective home-buyers are often surprised to learn how much money they will get back in tax savings. The tax code[notdef]allows you to deduct what you pay in interest from your taxable income and plays a weighty financial role when computing the benefit of owning versus renting.

“In light of these tax savings, the taxpayer may elect to reduce his or her employer withholdings, thus taking home more cash throughout the year (instead of opting for a refund when filing a tax return in April),” said Murakami. “This is how you can make homeownership pay off throughout the year, and not just at tax time.”


Property taxes paid are also fully deductible, as long as you itemize. If you recently purchased a home, check your closing documents, as any taxes paid at closing may also be deductible.

“For a typical homeowner with $54,000 in taxable income, the deductions for mortgage interest and real estate taxes have been estimated to be worth $7,500 during the first five years of homeownership,” said Murakami.


Perhaps the biggest tax-related benefit comes if you decide to sell your home. If you’ve lived in the home for two of the most recent five years at the time of sale, you are entitled to keep — tax free — profits from your sale of up to $250,000 if you’re single and up to $500,000 for married couples. You no longer have to reinvest your profits or move up to a more expensive home to avoid paying tax on capital gains. In fact, you can sell a property every two years and pocket the profits if the home meets the eligibility requirements, according to Murakami.

Additional tax deductions include:

• PREPAID INTEREST — Points are generally deductible, as long as they are designated as prepaid interest.

“There are specific requirements to deduct points in the year paid rather than over the life of the loan,” Murakami said. “Consult with your tax adviser for more on this.”

• HOME EQUITY DEBT — Homeowners can also use their home equity to pay off credit cards, assist children with a down payment for a home of their own, pay for education expenses, or consolidate credit card or other debt, and that interest can be deductible on loans of $100,000 or less.

“Debt that is incurred to buy, build or substantially improve the home is considered acquisition debt,” said Murakami. “If you take out a loan for any other reason, it may be considered home equity debt for tax purposes. Interest on home equity debt is deductible, subject to debt limits.”

• ENERGY-EFFICIENT HOME IMPROVEMENTS — “The main credit in Hawaii would be the Federal Residential Energy Efficient Property Credit and the Hawaii Renewable Energy Technologies Income Tax Credit, which applies to the installation of photovoltaic systems. The federal credit expires on Dec. 31, 2016,” said Murakami.

For an informed look at the tax savings that home ownership may offer, consult a tax adviser. For more information on mortgages, and home equity loans and lines, talk to a personal banker at First Hawaiian Bank.

Disclaimer: The information contained in this article is intended to be general in nature, and is not intended to serve as legal, accounting or tax advice. Please consult your tax adviser for specific situations.

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