What You Want to Know Before Purchasing a Vacation Home in Hawaii
According to the Wall Street Journal, a survey conducted by the Realtors association showed that the primary reason for purchasing a second vacation home was for vacationing. Securing a vacation home in your favorite place is certainly appealing, especially if it may end up being where you retire. Investing sooner than later may also make financial sense.
It’s important to work with a Realtor that will not leave you with any surprises at the closing table and beyond. I really believe the process should be an enjoyable one that moves along as smoothly as possible. It is easy to get caught up in the beauty and excitement of the dream when making a second vacation home purchase. This is especially true if it is your first, or your first in Hawaii. This is also why you want your Realtor to be on top of the practical details of your purchase. There are laws specific to the state of Hawaii and each county related to second homeowners uses and taxes. Thinking about renting it out when you are not using it? If so, there are many considerations to weigh out prior to starting your property search.
Planning to rent out your second vacation home? Know your market first!
There are two rental markets to consider for your vacation home investment. The state of Hawaii has zoning laws pertaining to short term and long term rentals. Each county (island) has its own laws on what constitutes short term versus long term. Unique income taxing structures also apply to each rental term. More importantly is that short-term rentals are restricted to where they can be in operation on the islands. Short-term rentals require permits and fines can start at $10,000 per day if found to be in violation.
Do you plan to rent your vacation home out to others here on vacation? If so, you will need to make sure that you are searching for a property within what is called a Vacation Destination Area (VDA). The permit ensures the rentee that they are in compliance with local zoning laws and won’t be asked to leave. These laws were created for a few reasons. A primary reason was to reduce disruption in residential areas. Another reason was to help ensure that outside investors of vacation rentals in Hawaii wouldn’t be able to dominate the local residential housing market. The area outside of a VDA is where long-term rentals of six months or more are allowed. A different income tax structure applies to them.
VDAs and HOAs
Knowing which rental market best suits your short and long-term goals is critical before starting your search. Some HOA covenants restrict short-term renting even if the property is within a VDA. So, even though you may have found your perfect vacation home in a VDA, there may be an HOA covenant that does not allow for short-term renting. You want to be clear on your options and then be clear with your Realtor about which market you would like to rent out to if any.
Other than that, gathering information related to applicable taxes, HOA fees, rental management, marketing, maintenance and cleaning fees are further considerations that will play a role in your buying budget.
Taxes you may deal with when buying, renting out or selling your second vacation home:
GET is an acronym for General Excise Tax and is to be collected and paid to the state on all long-term rental income collected from tenants. There is a business license registration application and fee for obtaining a GET tax ID. This tax applies to rentals of 180 days or more.
TAT is an acronym for Transient Accommodation Tax, and it is imposed on all applicable short-term rental income. Renting a property short term also requires a permit. Many repeat travelers to Hawaii now know to verify that the short-term rental is legally permitted. This tax applies to rentals of less than 180 days. There is also a business license registration and application fee for obtaining a VDA Permit and a TAT tax ID.
Both GET and TAT can be charged to the tenant in addition to the rental fee. There are also deductions that may apply to your rental business.
Conveyance Tax for Out of State Sellers
There are two types of conveyance tax applied at the time of closing which is held by an escrow agent, called HARPTA and FIRPTA. These are withholdings from the sellers received funds at the closing. The withholding amount is a percentage based on the bracket of the purchase price. It was created to prevent capital gains tax monies from leaving the state. Knowing about these price brackets can also be critical during negotiations if the seller is an out of state owner and not aware of them themselves.
HARPTA is an acronym for Hawaii Real Property Tax Act. This is a state sales tax paid by the seller on the price of the property sold if the seller is an out of state resident. This tax is held by the escrow agent and is paid directly to the state at closing.
FIRPTA is an acronym for Foreign Investment in Real Property Tax Act. This is a Federal sales tax paid by the seller on the price of the property sold if the seller is an out of country resident. This tax is held by the escrow agent and is paid directly to the state at closing. If the seller is an out of country resident, both the HARPTA and FIRPTA taxes are withheld at the closing.
Either of these taxes may be relevant at the time of your purchase and if you remain an out of state resident owner at the time you may sell your vacation property in Hawaii. These taxes are always subject to change so check with your tax professional for the current rates. When and if it comes time to sell, talk with your listing agent about forgoing HARPTA or FIRPTA with a 1031 Tax Deferred Exchange if you plan on reinvesting in the sale monies on other Hawaii state property.
I would like to help you keep informed to make a sound investment decision while securing the perfect second vacation home. Please contact me at CindyShannon@hawaiilife.com.
This article has been created for informational purposes only and is not offering tax advice. For all tax planning please consult with a licensed tax professional.