🏝️ Why 2025 Is the Year to Buy: Hawai‘i Homeowners Score Big with Tax Deductions

The Newly Enhanced SALT Deduction: More Savings for High-Tax Locales

For those of us living in areas with higher state and local taxes (and let's be honest, Hawaii can fall into that category!), the temporary increase in the SALT deduction cap is welcome news. Previously capped at $10,000, the new law raises this limit to a generous $40,000 for the 2025 tax year.

Here's the lowdown:

• Bigger Deduction: You can now deduct up to $40,000 for the total of your state and local property taxes, income taxes (or sales taxes, if you choose to deduct those), and personal property taxes.
• Income Considerations: This full $40,000 benefit is available for individuals and couples with a modified adjusted gross income (MAGI) below $500,000.
• Gradual Phase-Down: For those with a MAGI exceeding $500,000, the deduction will gradually decrease but won't fall below the original $10,000 limit.
• Temporary Boost: Keep in mind this higher cap is temporary, increasing by 1% each year until 2029 before reverting to $10,000 in 2030. So, make the most of it while it lasts!
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PMI Deduction is Back and Here to Stay!

Another fantastic piece of news for homeowners (and aspiring ones!) is the permanent restoration of the Private Mortgage Insurance (PMI) deduction. PMI is typically required by lenders when you have a conventional mortgage and make a down payment of less than 20% of the home's purchase price.

What you need to know:

• Deductible Expense: You can now deduct the premiums you pay for PMI as if it were deductible mortgage interest.
• Itemize to Claim: To take advantage of this, you'll need to itemize your deductions on your tax return.
• Permanent Relief: Unlike the SALT changes, this deduction is here to stay, offering long-term tax benefits for many homeowners.

Beyond SALT and PMI: Other Homeownership Tax Perks

The savings don't stop there! As a homeowner, you might also be able to deduct:

• Mortgage Interest: The interest you pay on your mortgage for your primary and (sometimes) a second home can be a significant deduction. Limits apply based on when you took out the loan.
• Points: If you paid points to lower your interest rate when you got your mortgage, you can generally deduct them in the year you paid.
• Home Equity Loan Interest: Interest on home equity loans or HELOCs is deductible if the funds are used to buy, build, or substantially improve your home.
• Home Office Expenses (for the self-employed): If you use a dedicated part of your home exclusively and regularly for your business, you might be able to deduct related expenses.
• Medically Necessary Home Improvements: Certain home improvements for medical reasons may be deductible as medical expenses.

Don't Forget Tax Credits!

Tax credits directly reduce the amount of tax you owe, making them particularly valuable. Keep an eye out for:

• Residential Energy Credits: If you invest in energy-efficient upgrades like solar panels, you could be eligible for valuable tax credits. These are currently set to expire at the end of 2025, so act fast if you're considering these improvements!

Does Buying in Oahu Truly Pay Off? The Math Behind Owning vs. Renting

While renting a one-bedroom in Oahu for $2,000 might seem cheaper than buying one for $350,000, let's look at the numbers for homeownership. Assuming a 10% down payment, a $315,000 loan at 6.67% interest, and a monthly mortgage payment of about $2,022, your total monthly ownership costs would be approximately $2,434, including property taxes, PMI, and insurance. Although this is higher than the average rent, the long-term financial benefits of owning begin to change the equation.



How Much Can You Deduct Annually?

Now let's look at the tax deductions. In the first year of a mortgage, the vast majority of your payments go toward interest.

• Mortgage Interest Deduction: In the first year, you would pay a significant amount in interest—roughly $20,800. This entire amount is deductible, lowering your taxable income.
• Property Tax Deduction: You can deduct the full $1,225 you paid in property taxes, thanks to the new SALT deduction increase.
• PMI Premium Deduction: With the permanent restoration of the PMI deduction, the entire $2,520 you paid in premiums is also deductible.

Total Estimated First-Year Deduction: $20,800 (Mortgage Interest) + $1,225 (Property Taxes) + $2,520 (PMI) = $24,545

This is a substantial amount that is removed from your taxable income. For a couple earning the median household income in Honolulu, this could translate to significant tax savings—often thousands of dollars—that are not available to a renter.

The Bottom Line: Does It Break Even?

When comparing the monthly costs of renting versus buying, it’s easy to see how renting might seem like the more affordable option. However, the true financial picture becomes clearer when you factor in the long-term benefits of homeownership. The significant tax deductions on mortgage interest, property taxes, and PMI, combined with the equity you build over time, can make owning a home more financially advantageous than renting.

Ultimately, these financial benefits often mean that the long-term value of owning outweighs the higher initial monthly costs.

Ready to find out if owning is right for you? Your best next step is to connect with a local mortgage professional, tax professional, and a knowledgeable realtor to explore your specific options.

Feel free to contact me for recommendations of trusted professionals who can help you navigate this process.

Disclaimer: I am not a financial professional or accountant. This information is for educational purposes only and should not be considered financial advice. You should always consult with a qualified professional to discuss your specific financial situation.