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Tax Information Taxes are a concern in real estate, especially any available tax benefits. On this page, I will cover both State of Hawaii and Federal tax information in the following order. If you want to jump to a particular subject, just click on it.
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of 1997 together with the Balanced Budget Act of 1997. The tax law makes more than 800 changes which may take effect at different times after the enactment of the law, but for the purposes of this page, I would like to mention the law's affect on the sale of your home, or more specifically the sale of your principal residence. Under prior law, profit on the sale of your home could be deferred, but only if you purchased a home of equal or greater value than the one you had sold. You could choose also to take a one time exclusion from income of $125,000 but only if you were over 55 years of age. The new law allows a much greater tax benefit. The law exempts from taxation profits on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles. You must have used the home as your principal residence for two of the last five years. You do not have to purchase another home to qualify for this exemption, and you may benefit from the exemption each time you meet the requirements, but you may not claim more than one exemption within a two year period. The IRS issued final regulations relating to the exclusion of gain from the sale of a principal residence in December of 2002 which address principal residence. The residence must be the home which the taxpayer uses a majority of the time during the year, but a list of other factors can be taken into account, such as place of employment, address on tax returns, driver's license, auto registration, and voter registration to name some of them. For more information on the final regulations, please go to DeadlineNews.com. The final regulations address the two year occupancy requirement and provide for a reduced maximum exclusion if the sale is by reason of a change in place of employment, health or unforeseen circumstances and they provide guidance regarding the computation of the reduced maximum exclusion. For more information on the reduced maximum exclusion, please go to Weiss & Weissman, Inc.. The Taxpayer Relief Act of 1997 also reduced the top capital gains tax rate, which had been 28%, to 20%. Taxpayers in the 15% income tax bracket would pay 10% on capital gains. For assets sold after July 29, 1997, the rate will apply only if the assets have been held more than 18 months. Depreciated real property is subject to special recapture provisions. Assets purchased in 2001 and later and held for more than five years will be taxed in the lowest tax bracket at 8% and in the higher brackets at 18%. Please consult your tax advisor for more specific information on how to handle these assets. See also File Tax for an overview of the entire 1997 act. Back to tax information list Depreciation of Real Estate Investment Property Although some older methods of depreciation may still be available for property owned prior to the end of 1986, the usual minimum allowable depreciation time is 27.5 years for residential property and 39 years for non-residential property. No depreciation can be taken on the land portion of the value of the property because as the IRS says, lands does not wear out, become obsolete, or get used up. Here is an example of straight line depreciation. Suppose an investor buys an apartment building for $500,000, but the value of the land is $250,000. The allowable depreciation deduction will be $9,090 per year ($250,000 divided by 27.5 years) regardless of the source of funds (whether from the investor or from a lending institution.) Because the source of the funds to buy the property makes no difference, this is a good example of using other people's money to extend your investments. The easiest way to get started on this course is the use of your equity (or ownership) of a property to borrow funds to make the down payment for another property which might become an investment property, such as an apartment or a condominium. You have used a small amount of equity to extend your property ownership and potentially increase your income, your net worth and the cost basis for depreciation. The IRS has written volumes on the subject of depreciation. Please visit the IRS website and review Publication 946, "How To Depreciate Property" and also visit your financial advisor. Get Acrobat Reader
Investment properties are also the subject of my page 1031 Exchanges. Tax "Write Offs" and Credits for Real Estate It is fair to say that overall it's probably better to own the property you live in than to rent it from someone else, at least financially. One of the best reasons is that when paying a mortgage, you are building equity in your property each time you make a principal payment, and that is like putting money in the bank. You are paying yourself. And you can use that equity in the form of a second lien against the property. If you have a 30 year first mortgage at a fixed rate, your mortgage payment will not change for the entire 30 years, whereas if you rent for 30 years, you will always be subject to rent increases tied to the rental market, which is very much a supply and demand market. At tax time, the interest portion of your mortgage payment for the year may be subtracted from your income decreasing the taxes you owe. In addition, any second mortgage interest may, most likely, be "written off" against your income further reducing your taxes. Your property taxes are tax deductible. The points that you pay the lender, which can be as high as 2 percent of the loan, are deductible, regardless of whether they were paid by you or the seller. Your closing costs can be deducted in the year that you sell your house as they will be figured into the adjusted cost basis of your home. Closing costs include title insurance, loan application fee, credit report, appraisal fee, escrow fee, document preparation fee to the attorney(s), lender service fee and recording fee. Your adjusted cost basis in the year that you sell will also include costs that you made for improvements to the home such as carpeting, fencing or painting the house.
There may be State tax credits available, such as a
credit for the installation of a solar system in your home, or a credit for
an improvement made to the property for that year, or, at least here in
Hawaii, a credit for the installation of other renewable energy systems. 1031 Exchange Deferred Capital Gains on Real Estate
When selling investment property, you can defer the payment of capital gains
by electing to complete a 1031 exchange under Section 1031 of the tax code.
This deferral is not really a tax "write off" of credit, but it certainly
does affect your tax situation in a direct way. More on 1031 Exchanges County of Hawaii Real Property Taxes The real property taxes for the county of Hawaii (the Big Island) for the fiscal year July 1, 2009 to June 30, 2010 are:
Chapter 19, Article 11, Section 19-90 of the Hawaii County Code provides that the tax rates be set on or before June 20 preceding the tax year for which property tax revenues are to be raised.
Please note that property taxes differ from county to county within the
State. County of Hawaii HOMEOWNERS EXEMPTION FORMS IF YOU PURCHASE A HOME IN HAWAII COUNTY AND ARE PLANNING ON LIVING IN IT, PLEASE APPLY FOR THE HOMEOWNER PROPERTY TAX EXEMPTION BEFORE DECEMBER 31 FOR THE EXEMPTION TO TAKE EFFECT BY JULY 1 OF THE FOLLOWING YEAR. IF YOU APPLY IN THE FIRST HALF OF THE YEAR, THE EXEMPTION WILL TAKE EFFECT ON JANUARY 1 OF THE FOLLOWING YEAR. YOU WILL SAVE HUNDREDS OF DOLLARS ON YOUR PROPERTY TAXES WITH THE HOMEOWNERS EXEMPTION IN PLACE. You must apply for the homeowner exemption to obtain the homeowner tax rate listed in the above table. The form may be obtained with the link below or at the Hawaii property tax site. At the site, please highlight Forms and Instructions and, when you have entered that page, highlight Exemptions and scroll down to the Homeowner's Exemption. You can print the forms and additional information about the homeowner exemptions. You may also read about how to compute your own taxes. The basic homeowner's exemption is $40,000 (subtracted from the assessed value of the property) and the application of the above homeowner tax rate to the remaining assessment. There are additional exemptions based on your age. There are homeowner exemptions for certain disabilities. The forms are available in .pdf format at the links below. Get Acrobat Reader
State of Hawaii General Excise Tax There is no sales tax in the State of Hawaii. The State's General Excise Tax (G.E.T.) taxes on the gross receipts or gross income individuals, corporations, partnerships, or other entities derive from their business activities in Hawaii. It may look like a sales tax when you buy something in a store and you pay tax, but actually that is an example of the retailer passing the excise tax on to the consumer. The tax to the retailer is currently 4% of the gross receipts, but because he collects the tax, he also pays tax on the 4%, so the retail general excise tax passed on to the consumer is 4.167%. Realtors must pay the General Excise Tax on their commissions, and like other professionals in the State, they may pass that tax on to their client, usually the seller since he most often pays the commission. The General Excise Tax can be "written off" as a business expense.
To learn more about the General Excise Tax, use this link to go to the
State's General Excise Tax brochure State of Hawaii Tax on Rental Properties If you have rental properties in the State of Hawaii, you must get a General Excise Tax license. If you have rental properties that you are renting to people short term (less than 180 days), you will also have to acquire a Transient Accommodations Tax license. The Transient Accommodations Tax (T.A.T.) is currently 7.25%. To apply for these licenses, you must complete the State's Basic Business Application. The Department of Taxation has the application on its website. You may complete it online, print it and mail in with the appropriate registration fee(s). You must, in addition, pay income tax on rental income, whether you live in the State or outside the State. There is also a very complete brochure at the State website which answers many questions about collecting both the G.E.T. and the T.A.T. and addresses some of the income tax issues. Rental Brochure. Back to tax information list
I have been asked what the State of Hawaii tax rates are. Click 2009 Hawaii Tax Table. There is a wealth of
information on the State's Department of Taxation website.If you have a specific question about the
State's taxes, please email me. HARPTA and FIRPTA Withholding for Non-Resident Sellers of Real Property Under Hawaii law, if the seller of real property is a non-resident person or entity, the purchaser of the property must withhold a specified percentage of the "amount realized" by the seller and forward that amount with the appropriate form to the Department of Taxation. The seller may file a Certificate of Exemption with the State, or the seller may apply for a waiver on Form 288B, in which cases the buyer will not be required to collect the withholding. It has been my experience that the withholding is usually 5% of the sales price of the property. IF YOU ARE AN OUT OF STATE SELLER, ASK YOUR REALTOR WHAT YOU CAN DO, IF ANYTHING, TO AVOID THE WITHHOLDING. Please also go to the link that contains all the tax forms and instructions connected with the HARPTA withholding. Review particularly Form 288B. HARPTA withholding forms
Similar to HARPTA, FIRPTA is the Federal version of withholding of the
"amount realized" by the seller, who in this case, is a foreigner; that is,
a person not living in the U.S.A. The Foreign Investment Real Property Tax
Act of 1980 addresses the federal concern that a foreign individual will
realize gain from the sale of a property in the U.S.A. and not pay federal
taxes on the gain, and so, in general, a 10% withholding is required of the
seller and is collected by the purchaser and forwarded to the Internal
Revenue Service. Please see the IRS website FIRPTA withholding for more information. Hawaii Conveyance Tax on Real Property
In Hawaii, all documents transferring an interest in real property,
including all leases of five or more years, must be accompanied by a
conveyance tax certificate. Within 90 days of any disposition of real
property, the seller must pay a conveyance tax. The deed cannot be recorded until the Conveyance Tax Certificate has been
filed and paid. Excluded from this requirement because the recipients have
paid no consideration, is property received through probate of an estate, as a gift under the laws of descent, as the result of the death of a joint
owner, property where the consideration may be nominal and is thus less than $100, or property transferred at the time of satisfaction of an agreement of sale. The conveyance tax rates changed in 2005. For complete information on the changes and to review the forms, please go to Conveyance Tax.
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