Home buyers and home sellers in Hawaii are subject to a number of tax liabilities such as capital gains tax, transfer tax, and property taxes. In this article, we’ll outline the most important tax regulations in the state and give you some tips on how to reduce your tax exposure.
If there’s one thing you can know for sure in this life, it’s that you’re going to be paying taxes. Real estate is no exception to this rule. While US tax law is filled with many subtleties and nuances that can be confusing to homeowners and tax professionals alike, there are three main types of taxes to be aware of: capital gains tax, real estate transfer tax, and property taxes.
In this article, we’re going to go over the Hawaii real estate taxes you’ll need to pay when either buying or selling a home in the Aloha State. We’ll also give you some tips to lower your tax exposure no matter what side of the market you’re on.
Will You Have to Pay Taxes When You Sell Your Home in Hawaii?
Sales tax is not applied to property sales on either a federal or state level. However, if your home appreciated in value since you bought it, you may need to pay capital gains taxes on your annual tax return.
Currently, if you are single and you’ve lived in the house for at least two out of the last five years, then the first $250,000 of profit is exempt from taxation. If you are married, the first $500,000 in profit is tax free.
There is one stipulation when it comes to claiming this tax break: you cannot exclude capital gains from another home sale within the past two years. That means that if you are single and sold one house for $250,000 of profit last year and then sell your current home for another $250,000, you will be taxed on all the profit from your most recent sale.
Hawaii also has regulations that apply to real estate investors in the state: FIRPTA and HARPTA. FIRPTA, or Foreign Investment in Real Property Tax Act, is a law that requires withholding of 15% of the sales price when property is sold by a foreign national. Similarly, HARPTA requires a withholding of 5% of the sales price when property is sold by an out-of-state resident. Keep in mind that these rates apply to the entire sale price, not just the capital gains realized.
How Much Are Real Estate Transfer Taxes in Hawaii (and Who Pays Them)?
When property is transferred from one party to another, many states and local municipalities levy a transfer tax as a percentage of the value being transferred. In the case of real estate property transfer, this tax burden usually falls on the seller, but each state can specify (or not specify) whether the buyer or seller will pay.
In Hawaii, this tax is referred to as the Conveyance Tax. The rate that the transfer is taxed at depends on its value. For Hawaii residents transferring under $600,000, the rate is 0.1% of the value, or 0.15% for non-residents. The rate slowly goes up in seven iterations until you reach the highest rate, which is 1% for property transfers of $10,000,000 or more, and 1.25% for non-residents.
In most cases, the seller takes responsibility for the transfer tax, the only exception being if the property is sold by the United States, the State of Hawaii, or any instrumental agency of the two. Since the tax rates go up based on sales price, it may behoove sellers to lower their prices slightly if they are right on the brink of a rate hike. In order to make an informed decision regarding pricing your home to reduce tax exposure, speak with a qualified real estate agent.
How to Calculate Property Taxes in Hawaii
Property taxes are only paid at the state and local levels. Luckily for homeowners in Hawaii, the state has the lowest average property tax rate of any state in the country, making it that much easier for residents to enjoy the islands’ pleasant tropical climate.
The average statewide property tax rate is 0.27% of the home’s value. Considering the median home value is $563,900, home buyers can expect to pay approximately $1,529 annually in property taxes if they own a home valued at somewhere around the median.
It’s important to note that property tax rates vary based on the county you live in. Honolulu County, for example, has an effective tax rate of 0.28%, meaning that a home at the median value would rack up an annual tax burden of $1,578.92. In contrast, Maui County, which has the lowest effective property tax rate in the state (and thus the country) at 0.18% would only create a tax liability of $1,105.02 for a median-valued home.
Tax Breaks for Hawaii Home Buyers & Sellers
Both buyers and sellers in Hawaii may be eligible for tax breaks and deductions. Here are a few of the best options for reducing tax exposure.
Tax Breaks and Credits for Buyers
Home exemption: Homeowners in Hawaii are allowed to take a $48,000 exemption from the value of their home. This means that if you buy a home for $500,000, you would only be taxed on $452,000. This significantly lowers your tax exposure, but only applies if the home is your primary residence and you filed the necessary paperwork by December 31 of the preceding tax year.
Mortgage interest deductions: All home buyers in Hawaii are eligible for the HHFDC mortgage credit certificate program. This allows home buyers to claim up to 20% of their paid annual mortgage interest as a tax credit on their federal income taxes.
Tax Breaks and Write-Offs for Sellers
Pre-sale improvements: If you make significant improvements to your home which add value or restore it to like-new condition, you can deduct the expenses. However, the deduction cannot be taken in the year that you incur the cost. Instead, the expenses are deducted in the year that you sell the home.
Mortgage Interest: If you have remaining mortgage debt when selling your home, you may be eligible for a deduction. Currently, home sellers can deduct up to $750,000 of interest on a mortgage debt.
Home sale costs: Any costs associated with selling your home can be deducted at the federal level. These costs include real estate agent fees, staging costs, and pre-sale inspection expenses, among others.
Since the amount of tax breaks and deductions you can claim depends so heavily on the region you’re buying or selling in, it’s essential to work with a tax professional to ensure that you are taking every deduction possible. Going over your tax return with an experienced tax preparer or accountant is by far the best way to effectively reduce your tax exposure.
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