The deadline of September 1st is quickly approaching for the owners of almost 8000 condominiums on Oahu. This is the date that the property owners need to tell the city the use of the property which can greatly affect their tax rate. Letters of explanation should be mailed out shortly to outline the details of this possible enormous tax rate hike to the property owners. This possibly affects owners of condos that permit flexible use as residences, hotel rentals, and even offices.
The largest issue is if the property owners do not respond and end up doing nothing the rate will increase to the highest allowable tax category. This rate is four times higher than the current residential rate being paid now. The properties that this impacts the most are mainly in Waikiki but goes as far west as the Beach Villas in Ko Olina. This is all resulting in a bill that passed the city council in April 2017 known as Bill 8. The cities real property division is trying to overhaul a process that has been problematic for years. The issue has been surrounding mainly the mixed-use condo projects.
The goal of the new system is to try and keep the reporting fair with the tax bills and deter cheating. The current system is set up to have the property owners fill out a one-time form declaring the property use. This is whether it’s a primary residence, which includes being owner occupied, or for the transient accommodations. If the use changes down the road, it’s up to the property owner to inform the city and start paying the higher tax rate. The ultimate problem has been the monitoring and enforcement.
Most of the tax officials claim they receive regular complaints from neighbors in the same building. If the neighbor suspects the property is a short term transient rental, they are apt to call the city and complain. This is the mechanism that resulted in compliance checks. The potential investigation might result in changes to the tax rate. The old rules did not allow for penalizing the owners for improper reporting. According to the division administrator Steven Takara, in a 2015 audit of 4000 units, 40% were underreporting the taxes and should have been paying the higher rate. If the city had collected the proper amount of tax from the underreporting property owners it would have resulted in additional 6 million for the city in one year.
The current residential rate is set at $3.50 per $1000 of value. The hotel/resort rate is set at $12.90 per $1000 by way of comparison. If the property value per the accessors office was listed at $400,000 for the condo, the tax bill annually would be $1,400 and at the higher rate, it’s $5,160.
This new plan calls for the property owner to complete a form that will set the tax rate for 5 years that will automatically renew. This is allowing for a penalty of 10 percent plus one past year of correct taxes. This is in addition to the city increasing the compliance staff to check several hundred properties a year. Now you will basically never know who is watching and checking with a huge tax penalty to be paid by under-reporters. The use of the property might drastically affect the tax bill. This is something that should be discussed with your tax professional prior to making a purchase. The difference between a rental property and owner-occupied residence can be dramatic with respect to the annual tax bill.