1. Not Filing a Claim for Homeowners Exemption for property tax on or before December 31.
2. Using a Mainland CPA
3. Delinquent Property Taxes – if you plan to dispute don’t be delinquent
4. Purchase a Leasehold Property
5. Timing of your Purchase
#1 Not Filing a Claim for Homeowners Exemption on or before December 31If you fail to file a Homeowners Exemption by December 31 of the previous tax year you will be denied a homeowner exemption for the following year. Property tax assessments are sent out in February. This is often the first time a taxpayer becomes aware of a change in their property tax assessment or classification. A homeowner receives a $200,000 exemption and a lower tax rate. The homeowner rate is approximately one-half of the non-homeowner rate, depending on the classification of the property. It is a significant dollar amount in property taxes.
Real property tax rates are applied per one thousand dollars of value. The 2016 homeowner rate is $2.70. The Residential rate is $5.30. If you have single family home valued at $500,000 the annual taxes would be $2650. If you qualify for a homeowner’s exemption (and filed by 12/31) your taxes would be $810 annually. In this case forgetting to file the homeowner’s exemption form by December 31 would be an $1840 mistake to the property owner.
Your real estate agent and escrow company should advise you to file your Homeowners Exemption by December 31, and escrow should include the form with your escrow documents. The ultimate responsibility is still yours, however working with a knowledgeable experienced agent who guides you through the process will save you $1000s.
#2 Using a Mainland CPACPA’s make mistakes and if they are not a Hawaii CPA they may not know the local tax laws like they should. Some appeals brought before the Tax Review Board claim the taxpayer’s CPA made a mistake – they checked the wrong box on their tax returns, failed to file a form, transferred ownership to a child, etc. or set-up estate planning entities that result in a higher property tax rates. Let’s say you buy a $2,000,000 condo at Honua Kai and plan to use it as your primary residence. It is Hotel zoned property so the rate for a non-home-owner is $8.71. This $2,000,0000 condo’s tax bill for a non-owner would be $17,420 per year. For a Homeowner the tax bill for this condo would be $4860. If your CPA made a mistake and checked the box “part-year resident” on your tax form you are disqualified from a Homeowners exemption. That CPA’s mistake just cost you $12,560. My recommendation is to use a local CPA who knows Hawaii and local tax laws.
#3 Delinquent Property Taxes – if you plan to dispute don’t be delinquentLet’s say you get your tax assessment in February and find out your value doubled from the previous tax year resulting in a huge tax increase. You decide to file an appeal to dispute the valuation. Your tax bill is due but your appeal isn’t scheduled yet. You decide to hold off paying your bill until after your appeal. If don’t pay your property tax bill on-time you will be delinquent and subsequently the appeal will be denied. Be sure to pay your tax bill on time, even if you dispute your taxes or your appeal could be denied and may result in thousands of dollars for making this mistake.
#4 Purchase a Leasehold PropertyIf you purchase a leasehold property on Maui you should beware of the property tax consequences. County ordinance requires that real property be assessed in its entirety. Leasehold ownership (and market value) reflects only partial ownership interest (not including the land), however county law states that property assessment be based on fee simple interest in the property. Leasehold properties are valued much lower than fee simple properties so don’t’ be surprised when your tax assessment is much higher than recent comparable sales. If you purchase a leasehold property your tax assessment will be higher than market value and you will be paying higher property taxes.
#5 Timing of your Purchase – Are you a Winner or Loser?Timing is important for property taxes when buying property on Maui as you inherit the seller’s tax classification for the current tax year. You could be lucky and have a windfall by paying the prior owners Homeowner tax rate even though you don’t qualify, or you could be a loser and pay the non-home owner rate for up to 18 months even though you are a full-time resident. This is a problem with the strict Maui County Tax ordinance that has some unintended consequences. Some people get $1000s of dollars in reduced tax rates that don’t deserve it, while others lose $1000’s of dollars in tax exemptions who should qualify for them simply because of the timing of their purchase. The intention of the ordinance was to eliminate non-resident cheaters from getting exemptions that don’t qualify for them but in reality It’s created a windfall for some and a huge unfair loss for others.
A family living on Maui qualifies and receives a Homeowners Exemption and tax rate for several years. They decide to sell their house and purchase a brand new home. They sell in October before their new house is completed. They move into the new house in February and the new home is classified as “Residential” for property tax purposes since that’s what it is zoned at a rate of $5.30. The Homeowner rate is $2.70. The family that purchased this home does not qualify for a homeowner’s exemption because of the timing of their purchase. Why don’t they qualify? They don’t qualify because they did not file the Homeowners Exemption form by 12/31 of the prior tax year. They couldn’t have filed that form because they did not own it in December. This family is denied a home exemption because of the unintended consequences of the ordinance. They are full-time residents and should have qualified for the exemption but because of the ordinance they are the losers. Contact your Maui County Council member if you want to get this changed.
An example of an unfair property tax winner is someone who gets a break that they don’t’ deserve. The buyer of a second home who is non-resident purchases a property owned by a homeowner with an exemption at the beginning of the calendar year. They enjoy the lower tax rate for the next 18 months even though they don’t deserve it.
In closing, remember to file your Homeowners Exemption by December 31 and work with an agent who can give you expert local advice and save you thousands of dollars. Contact me. I’d be happy to help you with Maui real estate.
Real Property Tax Review Board