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Home in on Home Exemptions

Too often homeowners either pay too much in real property tax or have a misconception of the capital gains tax and how it will affect them if they sell their home. Here’s information that could save you thousands of dollars.

If you own property in Hawaii, you know that the tax you pay each year on your real property has dramatically risen in the past few years due to the unprecedented increase in property values. For many, however, the annual tax paid could have been reduced if they filed a home exemption form when they first purchased their principal residence.

The minimum exemption is $40,000 that is deducted from the appraised value of your home prior to the calculation of your real property tax. The amount of exemption increases accordingly with the age of the homeowner, up to a maximum of $120,000. For example, current exemptions are as follows: • $40,000 (under 55 years)

Also, if you or your spouse is blind, deaf or totally disabled there may be an additional exemption of $25,000 added to the amount to which you are already entitled.

Here’s an easy way to determine if you have an exemption on your principal residence. Take a look at the real property assessment card that was mailed to you. Next to the appraised amount you should see an exemption. If no amount is reflected under the exemption column, contact the Real Property Assessment Division of the City & County of Honolulu at 527-5500. Provide them the tax map key number that is printed on your assessment card and they will verify your findings and explain which form to complete to realize future reductions of your real property tax.

If you or your spouse qualify for the disability exemption, an additional form also must be completed. Forms may be downloaded from the City & County Web site at www.honolulu.gov/rpa. The deadline for filing your home exemption is September 30. It is not retroactive. Exemptions filed by September 30 this year will be effective for the fiscal year 2006/2007. Forms may be filed at any Satellite City Hall.

Another misconception many homeowners have is the impact of capital gains tax when a principal residence is sold. Many still believe that in order to defer paying capital gains tax on any profits realized in the sale of their home, they must purchase another home of equal or greater value. Prior to 1997, homeowners who were 55 or older could take a one-time exclusion of up to $125,000 when they sold their principal residence or they could avoid paying capital gains tax by purchasing another property of equal or greater value.

After the passage of the Taxpayer Relief Act of 1997, however, the homeowner’s tax burden was greatly reduced. Now when you have lived in your home as a principal residence for at least two years, you can make up to $250,000 in tax-free profit ($500,000 for couples depending on their filing status) when selling your home. You don’t have to buy another home to receive this exemption and you can use the money realized for whatever purpose you desire.

For example, you can downsize to a smaller home, condominium or retirement facility; travel; buy a new car or help pay for a grandchild’s college tuition — the money is yours to spend as you wish and you don’t have to pay a capital gains tax on it.

Best of all, there’s no limit on the number of times you can use this home exemption as long as this simple guideline is followed — you must have lived in the home you are selling for at least two years out of the past five years. If you have, you can start using the equity gained to enhance your “golden years.”

Each homeowner’s situation is different, so it’s always best to consult your tax adviser or accountant before taking action. n

George Uyeno and Deanna Mukai are Realtor Associates with Abe Lee Realty, a full-service real estate company in Honolulu. Together they have over 35 years of experience in real estate. For more information on your tax exemption benefits or other real estate-related questions, call Uyeno at 371-7860 or Mukai at 392-0881.

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