You know you'll have to pay taxes on your home. But do you know which taxes and how much? In addition to property tax, you'll also have to deal with transfer taxes. Learn exactly how Hawaii transfer taxes work and how you may be able to pay less than you think.
Transfer taxes, also known as a deed tax, mortgage registry tax, stamp tax, or conveyance tax, is the tax imposed by the city, county, or state whenever a piece of property is bought or sold.
The transfer tax is calculated from a percentage of the final sale of the home and can vary widely from state to state. So depending on where you live, you could encounter drastically high transfer tax rates or even in some areas, pay nothing at all.
Rules surrounding transfer taxes can differ from a state, regional, and local level, so it's imperative that whether you're selling or buying a home, you work with an experienced and local real estate agent who can help you navigate the transfer tax laws in your area.
The process of buying or selling your home can be expensive enough, you don't want to be blindsided by extra costs at closing. And in Hawaii especially, there are some unusual rules and special circumstances that surround transfer taxes.
But if you work with a skillful real estate agent, you'll be able to easily maneuver Hawaii's tax laws and perhaps even save some money.
Who Pays Transfer Taxes in Hawaii: the Buyer or the Seller?
The one held accountable for paying transfer taxes also varies by state. In some instances, the buyer and seller will split transfer taxes evenly and in other situations either the buyer or seller will cover the costs.
In Hawaii, however, the transfer tax is taken out of the profit made from the house's sale, meaning the seller is the one responsible for paying any transfer taxes at closing.
The seller should also be aware that in Hawaii, they need to pay any transfer taxes no later than 90 days after closing on the home, otherwise penalties and interest will be imposed on the transfer tax hiking up your costs even more.
How Much Are Transfer Taxes in Hawaii?
Compared to other states, Hawaii's transfer taxes are a little more involved. How much you pay will depend on the purchase price of the home as well as if the buyer qualifies for a Homeowner's Exemption.
|Home Value||Tax Rate (without exemption)||Tax Rate (with exemption)|
|<$600,000||0.15 per $100 (0.15%)||0.10 per $100 (0.10%)|
|$600,000 - $1,000,000||0.25 per $100 (0.25%)||0.20 per $100 (0.20%)|
|$1,000,000 - $2,000,000||0.40 per $100 (0.40%)||0.30 per $100 (0.30%)|
|$2,000,000 - $4,000,000||0.60 per $100 (0.60%)||0.50 per $100 (0.50%)|
|$4,000,000 - $6,000,000||0.85 per $100 (0.85%)||0.70 per $100 (0.70%)|
|$6,000,000 - $10,000,000||1.10 per $100 (1.10%)||0.90 per $100 (0.90%)|
|$10,000,000+||1.25 per $100 (1.25%)||1.00 per $100 (1.00%)|
A Homeowner's Exemption essentially means that you are claiming a piece of property as your primary residence. This home exemption was initially created to help provide some tax relief and to also encourage residents to settle down in Hawaii.
Of course, because Hawaii is an incredible vacation hotspot, many who sell or purchase homes may simply only be there for a few months out of the year and then hop back to the continental U.S. during the rest of the year.
With the Homeowner's Exemption, it rewards those who choose to make Hawaii their principal home helping to grow and contribute to the state's economy.
So how do you qualify for a Homeowner's Exemption?
In order to get this tax break, you must own and occupy the property as your primary home, meaning you must live there for 270 days out of the year.
Additionally, you also must record your home ownership at the Bureau of Conveyances, State Department of Land and Natural Resources, in Honolulu, as well as file a claim form for the Homeowner's Exemption.
If you meet these criteria, you could save thousands on transfer taxes down the road.
For instance, since Hawaii's transfer taxes are applied on a sliding scale based on the purchase price of the home, at the low end of the spectrum, with a home less than $600,000, you'll pay $0.10 per $100 of the purchase price if the buyer qualifies for a Homeowner's Exemption.
However, if the buyer doesn't qualify for a Homeowner's Exemption, with a home sold at less than $600,000, you'll be subject to pay a transfer tax rate of $0.15 per $100 of the purchase price.
Hawaii's transfer tax scale goes all the way up to homes purchased at $10,000,000 or more where you'll pay $1 per $100 of the purchase price with a Homeowner's Exemption and $1.25 per $100 of the purchase price if the buyer does not qualify for an exemption.
Can You Deduct Transfer Taxes?
Unfortunately, no matter what state you live in, you cannot deduct transfer taxes as they are essentially a transaction fee to legally transfer the title of a property from one party to another.
However, you can still use transfer taxes to your advantage and help reduce your tax exposure down the road when it comes to capital gains tax.
To do this, you can include transfer taxes as part of the cost basis of your home, meaning you add the amount in transfer taxes to the original cost of the home.
The advantage here is that when you sell, your total gain on the home will be less, helping to offset and reduce the total amount you'll be taxed on the capital gains tax.
When buying or selling a home, you should expect to pay any transfer tax fees as part of the closing costs.
During closing, there's always added costs and fees for both buyer and seller, and while you can negotiate who pays, you'll want to make sure you budget properly so you can cover both transfer taxes and any additional closing costs.
Sellers — especially in Hawaii where the seller pays the transfer tax — should also keep in mind another cost saving move could be to alter the initial asking price of their home.
For instance, if your asking price is $600,000, in Hawaii, that puts you into a higher transfer tax bracket. By lowering your asking price to $599,000, you would drop into a lower transfer tax bracket and save money down the line when paying your transfer tax.
And whether you're selling or buying your home, it's best to partner with a local and experienced real estate agent who can help guide you through the complexities of real estate taxes and transactions.