For military service members stationed on Oahu, buying a home can be a wise investment and an exciting opportunity to own a piece of paradise. However, considering your plans for the home when PCS orders take you off-island, is important.
Similar to the rent vs. buy conversation you’re likely to have before buying, determining your plans for the home once you leave Oahu should be part of the decision-making process. Why? Because there are a number of expenses involved in holding an investment property and important tax implications that can affect your bottom line when you sell your home.
Hawaii Revised Statutes requires any landlord, residing outside of Oahu, must assign an agent residing on Oahu to act on the owner’s behalf. While the appointed agent does not have to be a licensed property manager, it is in your best interest to hire a professional. Property management fees vary, but most charge 10% of the monthly rental amount.
(f) Any owner or landlord who resides without the State or on another island from where the rental unit is located shall designate on the written rental agreement an agent residing on the same island where the unit is located to act in the owner’s or landlord’s behalf. In the case of an oral rental agreement, the information shall be supplied to the tenant, on demand, in a written statement. Hawaii Revised Statutes Section 521-43(f)
Homeowner Association Fees
Explore what similar homes in your neighborhood rent for and determine if that amount will cover your mortgage as well as the monthly fees. If not, this could result in a monthly out-of-pocket expense.
General Excise Tax
Homeowners that rent their property are required to pay a General Excise Tax (GET) to the state of Hawaii. This is a 4.5% tax on the gross rent received, not the rent received after expenses. These taxes are due either quarterly or annually, depending on the amount of income generated.
Transient Accommodations Tax
Transient Accommodations Tax (TAT) is a tax assessed on properties that are rented out for less than 30 days (short-term rental). If you own a property that can legally be rented for less than 30 days, then you would be liable for TAT, which is 10.25% of the gross rent received, just like the GET.
Most homeowners are aware of the typical closing costs involved in selling a home, but if you choose to keep your property as an investment when you PCS from Hawaii, then it is critical to understand how HARPTA and Depreciation Recapture can affect your bottom line.
In Hawaii, non-resident sellers of real property are subject to a Hawaii Real Property Tax Act (HARPTA) withholding of 7.25% of the gross sales price of the home. Please note that the withholding is on the gross sales price, and not on the net proceeds from the sale. The monies are withheld by the State of Hawaii to ensure that non-resident property owners pay the taxes associated with the sale of real property.
However, military homeowners that sell their primary residence prior to a PCS move, would be exempt from HAPRTA, even if they have not declared Hawaii as their state of legal residency.
“Withholding of tax is not required for military personnel stationed in Hawaii who sell a principal residence and can exclude the gain under IRC section 121. The military personnel must submit Form N-288B to the Department to apply for a waiver from the withholding.” State of Hawaii Department of Taxation TIR No. 2019-01
But what if you decide to rent your home instead of selling once you PCS off-island?
When you convert your Oahu home from a primary residence to an investment property, there are important timelines that you will want to keep in mind, in order to avoid the HARPTA withholding.
Learn more about how the HARPTA withholding may affect your bottom line here.
Determining if you are eligible for a HAPRTA waiver is something that should be explored when making the decision between selling your primary residence or holding it as an investment property. Rely on your CPA for this determination, as most real estate agents and escrow officers cannot provide you with tax information.
The IRS allows you to deduct expenses related to your investment property, such as property taxes, mortgage insurance, operating expenses, and repairs. These deductions reduce your taxable income. If you sell the investment, the IRS is going to want some of that depreciation deduction back. This is known as depreciation recapture. The amount owed is based on your ordinary income tax rate and is capped at 25%. This is only applied to the portion of the gain attributable to the depreciation deductions you’ve already taken.
Before making decisions about buying, selling, or holding investment property on Oahu, it would be wise to consult a CPA to discuss your specific situation. Ask your CPA to run the numbers of the tax benefits and liabilities of selling your primary residence before you PCS, versus holding onto it as a long-term real estate investment.
Whether you decide to sell your home when you move, or you need property management resources, give me a call. I’d love to help!