Hawaii Rental Property Taxes FAQs

What are the advantages of owning rental property in Hawaii?

One of the main advantages in owning a rental property is that often times the property will operate for many years at negligible taxable profit, but may still provide significant cash flow. This is primarily due to the availability of depreciation as a tax deduction (discussed below). Also, Hawaii has a history of very steeply rising real estate values. Obviously, this trend has painful exceptions, for the most part, folks who are long term owners of Hawaii real estate realize significant capital gains.

What are Capital Gains?

Capital gains are (in a simple explanation) the difference between the selling price of the property and the purchase price, reduced by depreciation.

How about the disadvantages?

Most people check out the financial angle of owning real estate and try to make good decisions regarding the dollars and cents of the situation. However, many people who decide to buy an investment property have never been landlords. I urge people to think carefully about the implications of being a landlord. You are basically running a small business. It takes time - and if you don't devote the time, you will pay for it with high rates of vacancy and higher than necessary expenses. Not properly attending to landlord duties can negate many of the tax advantages of owning investment real estate.

What taxes do I have to consider as a landlord?

The four basic taxes types you will have to comply with are:

Property Taxes - Paid based on value of real estate. Property taxes in Hawaii are low relative to the rest of the country. Typically less than 1%

Income Taxes - You will need to prepare and file a Hawaii income tax return each year you operate the rental property, whether it makes money or loses money. Hawaii income tax rates range from 1.4 to 11.0 percent.

General Excise Tax (GET) - Due on all rentals (long or short term). This rate varies from 4.00 to 4.5 percent depending on the island.

Transient Accomodation Tax (TAT) Due on all rentals for terms of less than 180 days (six months) TAT rates vary from 10.25 to 10.75 percent depending on the island

What can I deduct against rental income.

Basically anything you spend in order to keep the propery in a rentable condition. Things like mortgage interest, utilities, real estate taxes and condo fees, repairs, landscaping, and depreciation.

What is depreciation?

When you pay for an asset, you are allowed to deduct the cost of that asset over the "tax life" of the asset. For commercial rental real estate the amount of tax life is 39 years. For residential, it's 27.5 years. After removing the land value from the purchase price plus any initial improvements, depreciation is taken ratably (in even increments) over the tax life.

EXAMPLE:

You buy a single family rent house for $300,000. The land is worth 25,000 and the house house therefore has a 'depreciable value' of $275,000; dividing this amount by 27.5 - you will be allowed to deduct $10,000 per year in depreciation. At the end of 28 years (the last of which you would take a $5,000 dollar depreciation charge) the asset would be fully depreciated.

What sort of taxes are due if I sell the property at a profit?

(What follows is a simplified explanation which disregards something called "depreciation recapture")

The depreciated value of the property being sold is deducted from the purchase price. The remainder is the capital gain. Assuming you've held the property longer than 1 year, the long term capital gains rates (the amount you will pay on the profit) are:

CAPTIAL GAINS (L/T) Tax Rats(married filing jointly)

Up to $77,000 0%

$77,000 to $479,000 15%

Over $479,000 20%