YEAR-END TAX TIP FOR HAWAIʻI VACATION RENTAL OWNERS
As 2023 quickly draws to a close, Hawaiʻi Vacation rental owners face the annual task of navigating the world of taxation.
We've created our "Year-End Tax Tips for Hawaiʻi Vacation Rental Owners" article to help demystify this sometimes complex process and provide owners with actionable insights and strategies to help optimize their financial outcomes.
From understanding Hawaiʻi 's distinct General Excise Tax (GET) and Transient Accommodations Tax (TAT) to mastering the art of record-keeping and depreciation, we'll dive into the nuances of Hawaiʻi's tax system.
Join us as we explore the essentials of Hawaiʻi vacation rental taxation while wishing you a prosperous new year!
PART 1: UNDERSTANDING THE WORLD OF HAWAII VACATION RENTAL TAXATION
Hawaiʻi vacation rental property owners must navigate a unique tax structure with Hawaii state-specific items. Understanding the obvious and subtle aspects is essential for effective tax planning, complying with all requirements, and optimizing individual tax situations.
General Excise Tax (GET): In Hawaiʻi, we do not have a Sales Tax; we have GET. GET is charged on all business activities and must be collected from vacation rental guests. The current rate is 4% but can differ (up to 4.5%) in unique locales. For example, on Oahu, it's 4.5%.
Please note:GET tax applies to the gross rental amount received.
Transient Accommodations Tax (TAT): In addition to GET, Hawaiʻi vacation rental owners must also collect the Transient Accommodations Tax from their guests. This 10.25% state tax is specifically applied to short-term rental accommodations (for guests staying less than 180 consecutive days).
Requirements for Tax Filing Requirements: Owners must register with the Hawaiʻi Department of Taxation to obtain a tax license for collecting GET and TAT. Regular filing of these taxes is mandatory, with the frequency (monthly or quarterly) depending on the amount of tax due.
Please note: Failure to comply with these filing requirements can result in some steep penalties.
Record Keeping: Meticulous record-keeping is important when managing a Hawaiʻi vacation rental. This includes tracking all rental income, tax collected and any deductible expenses related to the rental activity. This is more than 'collecting receipts.' Hawaiʻi vacation rental owners may want to employ a bookkeeper to ensure that records are organized and prepared ahead of time for regular tax filing.
Professional Assistance: Considering all the details, it's 100% advisable to consult with a tax professional experienced in Hawaiʻi 's tax laws, especially for owners new to vacation rental ownership or unfamiliar with Hawaiʻi 's tax system.
Local Tax Regulations: Be aware of county/island-specific regulations and taxes. Each county in Hawaiʻi may have its own special requirements for vacation rentals. This may include additional taxes, fees or deadlines that you want to be aware of and plan ahead for. One example is the Hawai'i County Transient Accommodations Tax (HCTAT). The HCTAT is the Big Island's 3% addition to the Hawaiʻi State TAT (the 10.25% tax).
PART 2: 3 YEAR-END TAX TIPS TO KEEP IN MIND
Hawaiʻi vacation rental owners can easily comply with tax regulations while totally maximizing on their benefits. Below are three tips to make a note of.
Deductions Specific to Hawaiʻi Vacation Rentals
Hawaiʻi vacation rental owners can deduct various expenses specific to their vacation rental activities. Owners can deduct typical rental expenses like marketing and website fees, cleaning and maintenance, utility bills, insurance, and property management fees.
More unique to Hawaiʻi, costs associated with maintaining a “Hawaiʻi aesthetic” or complying with local regulations can also be deductible. What does this mean?
It means that owners can also deduct costs related to landscaping for indigenous or food-producing plants or expenses for eco-friendly upgrades like solar panels, energy-efficient windows, composting systems, etc.
Please note: If the property is used for personal and vacation rental purposes, expenses must be apportioned based on the percentage of time the property was rented (at fair market value).
Best Practices for Record-Keeping Best Practices
Effective record-keeping is essential for Hawaiʻi vacation property owners. Not only for tax purposes, but also for managing the property efficiently. If you have more than one vacation property, maintain separate records for each rental property.
Use accounting software or a spreadsheet to track all income and expenses related to your rentals. This includes receipts, invoices, bank statements, tax filings, and records of GET and TAT collected and remitted.
Document the dates of rental and personal use of the property, as this affects the deductibility of expenses. Keeping records of any capital (structural or renovations) improvements or significant repairs is crucial, as these may affect depreciation calculations or be deductible over time.
Organize and review these records at year-end to ensure accuracy before filing taxes. If you have a bookkeeper or property manager responsible for record-keeping, check it with them so all items are transparent and double-checked for accuracy.
Depreciation Strategies
Depreciation can be a significant tax deduction for vacation property owners in Hawaiʻi, allowing them to recover the cost of the property over its useful life. The property (excluding surrounding land) can be depreciated over 27.5 years. It's essential to calculate depreciation from when the property is available for rent, not just when it is rented.
Improvements like renovations or additions can also be depreciated, but they must be depreciated separately from the original cost of the property. The year's end is an excellent time to review your property's depreciation schedule and consult your accountant to ensure you're maximizing this benefit while still complying with IRS rules.
Please note: When selling a property in Hawaiʻi, be mindful of the 'recapture' of depreciation, which can impact your capital gains tax. Speak with leading Hawaiʻi real estate professionals to learn more.
PART 3: HOW TO PLAN FOR TAX SEASON
Planning for tax season is a really important part of managing a Hawaiʻi Vacation rental property. Below are a few more items to keep in mind:
How to Estimate Your Tax Payments
For Hawaiʻi Vacation property owners, accurately estimating tax payments is vital to avoid underpayment penalties. To calculate tax payments:
Start by calculating your expected rental income for the year, including any additional fees charged to guests.
Subtract all deductible expenses, such as maintenance costs, property management fees, General Excise Tax (GET), and Transient Accommodations Tax (TAT) payments.
Remember to factor in depreciation, which can significantly reduce taxable income.
Use the current state tax rates to estimate your tax liability based on this net income figure.
Keep in mind that federal tax obligations will also apply.
Consider the previous year's tax return as a baseline for more accurate estimations, adjusting for any rental income or expense changes.
Please note: Quarterly estimated tax payments are often required for owners with significant rental income, so divide your estimated annual tax liability by four to determine these payments. Again, a certified Hawaiʻi State tax professional can assist with this.
2.Tax Assistance & Professional Hawaiʻi Property Managers
Professional property managers are invaluable for Hawaiʻi vacation rental owners, especially when navigating complex tax obligations. These managers typically have a deep understanding of local tax laws and can offer guidance on GET and TAT compliance, deductible expenses, and record-keeping requirements.
Beyond just tax compliance, property managers can provide insights into market-specific trends, helping optimize rental pricing and occupancy rates, which directly impact taxable income.
However, while property managers offer practical operational support, consulting with a tax professional, such as a CPA, who specializes in Hawaii real estate or vacation rental properties for comprehensive tax planning and preparation is 100% advised.
3. Staying Up-to-date on Changes in Hawaiʻi's Tax Laws
Staying informed about changes and announcements in Hawaiʻi's tax laws, particularly island-specific ones, is crucial for effective tax strategy planning.
Tax laws can change due to legislative actions or administrative rulings, impacting tax rates, deductions, and compliance requirements. Hawaiʻi vacation rental owners should regularly review updates from the Hawaiʻi Department of Taxation and local government websites.
Joining local real estate or vacation rental owner associations can also be beneficial, as these organizations often provide members with updates on tax law changes and advocacy efforts. Additionally, subscribing to newsletters from a local tax professional or attending webinars focused on Hawaiʻi tax laws can provide valuable insights.
Given that each Hawaiʻi an island may have unique tax implications, such as differing county taxes or regulations, a customized approach to each property's location is essential.
In conclusion for now, a proactive year-end tax planning approach is essential for Hawaiʻi vacation rental owners. By understanding Hawaiʻi 's unique taxation scene and implementing strategic tax practices, owners can effectively manage their obligations and optimize their financial position.
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We encourage you to embrace the unique real estate opportunities Hawaiʻi offers. For more information about real estate opportunities, Hawaiʻi rentals, and property management services with Hawaiʻi Life, Book a Free 15-minute Consultation, or call 855-447-3685.