Property Taxes

Homeowners in Hawaii pay property tax that is calculated at different rates for owner occupants and non-occupants. If you own and occupy the property as your principal home, defined as “the place where an individual has a true, fixed, permanent home and principal establishment and to which place the individual has, whenever absent, the intention of returning, and it is the place in which a person has voluntarily fixed their habitation, not for mere special, temporary, or vacation purposes, but with the intention of making a permanent home”, you are classified in the Homeowner Class. If your property is not used exclusively for residential purposes, you are in the Improved Residential Class. If you qualify for the Homeowner Class, you are eligible for the Home Exemption if you meet the following two criteria. First, your ownership of the property must be recorded with the Bureau of Conveyances on or before December 31 preceding the tax year for which the exemption is claimed. If you own lease property, there must be 10 or more years remaining on the lease in order to qualify. The second requirement is that you file Form 19-71 for the home exemption on or before December 31 preceding the tax year for which you are claiming the exemption. Every owner-occupied property is entitled to the basic home exemption: Basic Home Exemption = $40,000 The basic home exemption is deducted from the assessed value of your property to arrive at the net taxable value for the property. Senior citizens who are 60 years or older are eligible to apply for a multiple exemption to ease their tax burden. The multiple home exemption is determined as follows: Age 60 to 69 Exemption = 2 X basic home exemption Exemption = 2 X $40,000 = $80,000 Age 70 or over Exemption = 2½ X basic home exemption Exemption = 2½ X 40,000 = $100,000 To obtain the multiple home exemption, a taxpayer must be 60 years of age on or before January 1, preceding the tax year for which the exemption is claimed and submit form 19-71 on or before December 31 of the year preceding the tax year in which the exemption will take effect. A copy of your driver’s license or some other proof of your date of birth must accompany the form. Forms must be postmarked by December 31. Claims for exemptions may also be filed by totally disabled veterans, Hansen’s disease victims, the blind, deaf and totally disabled, and charitable organizations using their property for non-profit purposes. For more information on tax exemptions, call or visit the tax office in Kona at 75-5706 Kuakini Hwy., Suite 112, (808) 327-3540 or in Hilo at 865 Pi’ilani St., (808) 961-8201. Forms can be downloaded from their site at http://www.hawaiipropertytax.com .

Assessments

New assessment cards come out every March for the following year. Example: 3/2003 assessments are for assessed period 7/1/2003 to 6/30/2004. Tax Rates Hawaii County Council votes on tax rates every June.

Current rates:

• Owner Occupied $5.55/$1,000 of assessed value
• Investor $9.10/$1,000 of assessed value

Property taxes are collected twice during the fiscal year, which runs from July 1 through June 30. The first installment covers taxes due from July 1 through December 31 and is due on August 20, and the second installment covers taxes due from January 1 through June 30 and is due on February 20.

1031 Tax Deferred Exchange

The Internal Revenue Code Section 1031 Tax Deferred Exchange allows investors to sell income or investment real estate and buy another of like kind in order to defer all state and federal taxes on capital gain. The definition of ‘like kind’ is broad and includes any real estate held for investment purposes, including commercial real estate, rental property, bare land, etc.. Therefore, improved investment real estate may be exchanged for unimproved investment real estate, a rental home for a commercial property or any number of other such combinations. It is very important to note that sale of a primary residence will not qualify for a 1031 exchange. The advantage of this tax postponement is obvious. The investor can reinvest his or her full capital into new properties without any reduction due to tax payments. The government, in effect, extends an interest-free loan to the investor, who then is able to obtain leverage over and above that obtained from regular mortgage financing. The ground rules are simple and structuring your sale as an exchange can be easy, fast and inexpensive. In fact, a good third party intermediary (facilitator or accommodator as they are often called) and a qualified real estate agent will guide you through the entire process as long as you inform them prior to the opening of escrow that you intend to “exchange”. A good intermediary will insure that you follow the few strict rules of the Internal Revenue Code: One party must agree to cooperate and sign a novation, a document which outlines the intention to “exchange” rather than sell, at no additional expense or liability to the other party. An exchangor has up to 45 calendar days from the close of escrow on the relinquished property to identify in writing to the intermediary up to 3 replacement properties. If the exchangor wishes to identify more than three properties, special rules apply and your intermediary will provide the details of these requirements. Once the 45 day period has lapsed, the exchangor has up to 135 days to close on all replacement properties. Therefore, there is a total of 180 days to complete the entire 1031 Exchange transaction. (If you plan to close a sale of investment property after October 15, you will need to file an extension on your taxes in order to have the full 180 days to complete the exchange because of the April 15 tax deadline. Plan ahead.) A Reverse Exchange is possible and allows the exchangor to purchase the replacement property(ies) before selling the investment property currently owned. The intermediary will acquire title to the new property and essentially hold on to that property until the exchangor is ready to close on the sale of the old property. Talk to your intermediary for all of the details. If you would like to learn more about National 1031 Tax Deferred Exchange Services, please visit Granite Exchange.

Capital Gains Tax

Effective May 7, 1997, married couples filing jointly are permitted to exclude $500,000 from taxable capital gain resulting from the sale of their principal residence. Single filers and those who are married but file separately, may exclude $250,000 from taxable capital gain. This exclusion is available every two years. Any gain in excess of the exclusion is taxable. To qualify for the exclusion certain conditions must be met. The taxpayer must have owned and used the real estate as a principal residence for at least two of the last five years. Taxpayers who must sell prior to meeting this holding requirement due to job changes, health, or other “unforeseen circumstances” may qualify for a reduced exclusion. “Unforeseen circumstances” may be clarified in the future by further Treasury Department regulations. Divorced couples and those who are separated may also take advantage of the new tax law. Couples meeting the two following rules can each exclude up to $250,000 of capital gain:

            One of the spouses meets the 2 of 5 years rule.
            One of the spouses is living in the property under a court decree.

If they fail to meet these requirements both must meet the 2 of 5 years rule in order for each to qualify for the $250,000 exclusion. Most homeowners win because they now have the option of trading down, or selling and renting a new place to live, tax-free. However, those with more than the allowed limits in gain may not find the new rules as favorable (primarily those who have lived in now high-priced homes for many years).