So you've done your research and decided that you want to purchase your next real estate investment in Hawaii. Regardless of the massive spike in single-family and condo sales, the beaches and lifestyle are reason enough for Hawaii property owners to add a piece of paradise to their portfolios.
But how does Hawaii property tax work? Are there any exemptions if it's used for rental income or as a holiday home?
Keep reading to get the answers to all your questions about Hawaii property tax rates.
The Basics of Hawaii Property Tax
Despite the expensive property prices in Hawaii, homeowners and investors pay the lowest property tax in the nation. The average effective property tax in the state sits at 0.28% but is largely due to the generous owner-occupied exemptions.
Similar to most of the US, property tax rates in Hawaii are an annual fee based on the fair market value. This is accomplished whenever a county official comes out to appraise a new home or one that has been recently remodeled. However, many properties are subject to mass appraisals.
Mass appraisals use neighborhood data along with other factors once a year to produce notices of a property's assessed value to homeowners. Once the final value is calculated, exemptions are applied and subtracted from the amount before any tax rate considerations.
The tax rate will contrast greatly with each county, but each county applies the tax rate as X divided by $1,000.
For example, let's assume the residential rate for homeowners in Honolulu County is at 3%, and your home is valued at $500,000. That would mean your annual property tax bill would come in at $1,500 (0.003 X $500,000).
That's already a very low property tax rate, and it's before any potential exemptions!
The effective tax rate will vary with each county due to the numerous exemptions. The effective tax rate is the average annual tax paid as a percentage of the median home value of each county.
One of the major reasons why property tax in Hawaii is so low is due to exemptions available for homeowners. For example, homeowners in Honolulu County can make a basic exemption that reduces the taxable home value by $100,000. The basic rate for Hawaii real estate begins at $40,000.
However, the home must be owner-occupied and the principal residence. You can prove the property to be your principal residence by:
- Living in the property for at least 270 days of a calendar year
- Registering to vote within the county
- Filing an income tax return as a Hawaii resident
- Recording ownership
Additionally, seniors and those with disabilities may file for an even larger exemption, starting at $80,000 all the way to $120,000. Essentially, the older you get, the larger the exemption you may qualify for.
Real Estate Tax Benefits
One loophole that many real estate investors enjoy is the ability to convert existing rental properties into their principal residence after a 1031 Exchange.
Tax advantages aren't only for owner-occupants. Investors also have the following benefits available:
- Mortgage interest deduction
- Mortgage points deduction
- Property tax deduction
- Renewable energy tax credit
- Energy efficiency tax credit
- Septic tank tax credit
- Property management tax deduction
- Other tax deductions
Hawaii property investment has numerous benefits available to investors, but it's always best to get any individual tax-related advice from your CPA.
Investing in Hawaii
The property taxes in Hawaii work to make the state a much safer place. They fund all sorts of public servants, from firefighters and police to park rangers and lifeguards on the beach.
Are you searching for new investment property in Hawaii?
Get in contact with our specialists to help you navigate Hawaii property tax, find the right property, and fill it with reliable tenants as soon as possible!