Hawaii Real Estate HARPTA Tax Planning
Overview for Successful Ownership Avoiding Costly Tax Mistakes
Planning to buy, rent long term or vacation rent and eventually sell Hawaii real estate can be complicated and best done well in advance of contracting to buy or offering to sell real estate in Hawaii. Putting your real estate investment to work generating income by renting it out long term (180 days or more) or for even more $$$ as a vacation rental is a great idea to offset the cost of your permanent residence or pay for many future Hawaiian vacations for you and your family. Then, sell it down the road hopefully for a generous capital gain! When you grab a piece of paper or a spreadsheet to see how much of a good deal this is there are some tax implications you need to include to help you make the best choices and avoid surprises later on.
Please note this blog is aimed at helping United States taxpayers. If you hail from a different country, please obtain competent accounting advice in your country or a CPA in Hawaii.
As your realtor, I can help steer you in the right direction, but I am not a CPA. Of course, you will need to go over your plans with your CPA familiar with Hawaii tax regulations. This blog is simply an overview. For a deeper dive, check out State Hawaii and local county (island) tax websites, below. If you plan to use a property management service or book through online reservation services such as Airbnb, Homeaway, or VRBO, be sure to visit their help screens and FAQs for more good information and advice.
Whether you occupy or rent your place out, there is still property tax to be paid every year in semi-annual installments. It is one of the first questions I answer for each listing you are interested in. You can also look it up on the county (Honolulu (Oahu), Maui, Hawaii (Big Island), Kauai) website (see below) using the Tax Map Key (TMK)/Parcel Id in the MLS listing. If you occupy your new Hawaii home at least 270 days and you qualify for the standard, senior, disabled or disabled vet exemption you should plan filing for one. Check the property’s county website for more details. It could significantly reduce the assessed value of your property and less property tax per year.
Moving to Hawaii means you will have to file Hawaii state income tax returns each year. Even if you do not reside here and you rent out your Hawaii property, you will have to file an income tax return each year even if it does not create any taxable income. If renting out, have your CPA explain how Hawaii depreciation is computed and how it could affect your taxable income different from IRS depreciation computations.
Hawaii has a General Excise Tax (GET) instead of a sales tax on all business activities. For rental income, it is about 4% (higher on Oahu). For example, if you own a business in Hawaii or earn commissions here, you will be paying varying GET rates depending on the nature of your business. The same is true for rental income. And then for short term rentals 30 days or less, you will pay a Transient Accommodation Tax (TAT) of around 10.25%. Most pass these taxes on to the consumer (guests) and pay the amount collected to the Hawaii tax office. There are a few vacation rates quoted including the GET and TAT to avoid having to ask guests for them separately. As of this blog post, Airbnb, Homeaway, and VRBO do not collect them like they do sales tax for most other states.
Then you own your place for a while, hopefully an exceptionally long while, and you sell it. At that point, you could owe Hawaii capital gains tax. Just like the IRS you can exclude up to $250,000 of gain if you are single or up to $500,000 if married. And, you have both owned and occupied the property as a permanent residence for at least two out of the past five years. If less than two years, you could also qualify for lower exclusions. Of course, for rental property there are no such exclusions so keep good records of improvements and sales expenses that could affect basis computations. Check with a CPA for the details and any special circumstances.
When you close the sale as a non-resident of Hawaii 7.25% of the sales price withheld per HARPTA rules, by the buyer at closing (currently 7.25%). It is submitted to the State of Hawaii to be held until you, the seller, are current on all taxes you owe (Income Tax, GET, TAT, Capital Gains, etc) and you file to get it back. You could avoid the withholding before closing. Consult the (Hawaii Real Property Tax Law) HARPTA website or consult your CPA for all the details. If the sale produces insufficient funds or there is a capital loss, withholding may not be required, but closing could be delayed waiting for State of Hawaii approval. To keep closing on track, you may have to pay the withholding and settle with the State later. This is where getting your CPA engaged as soon as possible (well before closing and even before putting your property on the market) may be essential to a successful closing.
It goes without saying that you should meticulously preserve all the documents when you buy, manage and sell your property. The State of Hawaii will be hungry for all of them, particularly when filing for any amounts withheld at closing.
Well, that is it in a nutshell. Again, this is just to give you an overview. There is nothing worse (almost) than having your beautiful Hawaii getaway or vacation rental property for a long time and suddenly realizing you owe back taxes and significant amounts of interest and penalty to boot. Comparatively speaking, it is much easier and cheaper to do the research on the websites below, pay a CPA from the very beginning, and ask lots of questions of your realtor!
Please contact me, Eric West, at (808) 298-2030 and visit our comprehensive website with everything on the market now on every island and even SOLD transactions for comparison at click link.
Eric and Lisa West
Keller Williams Luxury Properties
Some websites you will definitely want to visit depending on the island you plan to buy on: