When a condo on Oahu is classified as ‘Hotel Resort’ the owner is allowed to run short-term rentals (rentals less than 30 days), subject to the House Rules of the condo not stating otherwise, and the property tax rate will be 1.39% of the condo’s total assessed value.
When a condo is classified as ‘Residential’ or ‘Residential A’, the two residential tax rates we have on Oahu that do now allow for short-term renting, the property tax rate runs from 0.35% to 1.05% of the total assessed value, depending on various factors. In either case, both ‘Residential’ and ‘Residential A’ tax rates are lower than the ‘Hotel Resort’ rate and therefore, if an owner of a condo classified as ‘Hotel Resort’ does not run short-term rentals, it may make sense for the owner to reclassify the unit to a residential tax status to save on property taxes.
See related article: Guide to Honolulu Property Taxes.
In the following we will review:
1) How to reclassify a property (from ‘Hotel Resort’ to ‘Residential’ and from ‘Residential’ to ‘Hotel Resort’).
2) The renewal process.
3) Possible reclassification penalties.
Reclassifying From ‘Hotel Resort’ to ‘Residential‘
Fill out the Petition to Dedicate for Residential Use and mail it to the Real Property Assessment Division and make sure they receive the letter by September 1st of a given year or, if you mail out late August or even on September 1st, have the letter postmarked by September 1st and, if granted (Oct 1st), the residential tax rate would take effect on July 1st of the following year (beginning of next fiscal year). If you mail the Petition after September 1st you have to wait an additional year to have your condo reclassified to residential.
Example 1: Mail the Petition August 30, 2021 (have it postmarked, since it is close to the September 1st deadline) and the residential tax rate should take effect July 1, 2021 (10 months later), if filled out corrected and granted.
Example 2: Mail the Petition September 5, 2021 and the residential tax rate should take effect July 1, 2023 (22 months later), if filled out correctly and granted.
Renewal of Residential Status
If you, the owner, filed the Petition to Dedicate for Residential Use, then the dedication will automatically renew every 5 years indefinitely – no future action needed! However, if you purchased a condo that already had been dedicated for residential use by the previous owner, then you, the new owner, will need to reapply for the Petition to Dedicate for Residential Use prior to September 1st in the 5th year – counting from the time the residential status was granted to a prior owner.
Example: Previous owner applied for the Dedication for Residential Use on August 7, 2017 and was granted residential use status July 1, 2018. You became the new owner in November 2019 and in the 5th fiscal year since the dedication was granted (5th year starts July 1, 2022) you need to fill out and mail in the Petition to Dedicate for Residential Use, however, it must be filled out and submitted prior to September 1, 2022 and the Petition will remain in place for as long as you are the condo owner.
Based on the above example, if the Petition is submitted after September 1, 2022 the property should be reclassified to Hotel Resort beginning the following fiscal year – July 1, 2023 – and you will have to reapply for the Petition to Dedicate for Residential Use prior to September 1, 2023 in order to be reclassified – again – to residential by July 1st, 2024. However, if the tax assessment office does not have your address on file (you, the new owner), the assessment office may think the previous owner is still the owner and the Residential Dedication Status may continue. Therefore, it is important to update the tax assessment office that you are the new owner in due time to ensure no mistakes happen about Residential vs Hotel Resort classification, depending on your preference. It seems like the owner address the tax assessment office have on file, may use the address they have from the Dedication to Residential Use form and possibly they do not look at public records to check if there is a new owner.
Reclassifying From Residential to Hotel Resort
If a property is currently classified as ‘Residential’ because you or a prior owner filed the Petition to Dedicate for Residential Use and you want to reclassify to ‘Hotel Resort’ because you want to run a short-term rental business (less than 30 days per tenant), then you have to send a letter to Honolulu’s Real Property Assessment Division and explain you wish to opt out of the Dedication for Residential Use and that your property be reclassified to ‘Hotel Resort.’
Make sure such letter includes the full address of the property, its TMK number and the address you wish the Real Property Assessment Division to mail their response to. The response letter you may receive from the Real Property Assessment Division should outline penalties due. (See explanation below.)
Where to Mail the Letter
First, call Honolulu’s Real Property Assessment Division (808) 768-3799 and ask for the name of the appraiser for your specific unit (have the TMK number ready), so you can address the letter directly to the appraiser who will review your letter. Then mail the letter to:
Real Property Assessment Division
ATTN: NAME OF APPRAISER
842 Bethel St.
Honolulu, HI 96813 USA.
You can mail the letter anytime during the year – there is no deadline.
Penalty Reclassifying From Residential to Hotel Resort
If you or a previous owner have dedicated a condo for residential use, you are ‘stuck’ with that dedication for 5 years, counting from the date the residential status started. However, by paying a penalty, you can cancel the residential dedication and get reclassified to Hotel Resort, anytime before the 5 year period is up, and start running short-term rentals.
Previous Fiscal Year’s Theoretical Hotel Resort Tax (A) minus Previous Fiscal Year’s Actual Paid Tax (B) = C.
C x 10% (penalty) = D.
C + D = E.
Current Fiscal Year’s Theoretical Hotel Resort Tax (F) minus Current Fiscal Year’s Actual Tax (G) = H.
H x 10% (penalty) = I.
H + I = J.
E + J = $ X (Penalties Due).
In case property was not classified as residential in the previous fiscal year, but only took effect in the current fiscal year, then the total penalty due will only be determined from the current fiscal year’s calculation (H + I = $ J).
You become owner of a condo September 12, 2019, which has been dedicated to residential use since July 1, 2017 and you wish to reclassify the condo to ‘Hotel Resort’ and determine your penalties.
Fiscal 2018 Total Assessed Value = $800,000.
Fiscal 2018 Property Taxes Paid = $2,800 (A)
Fiscal 2018 Property Taxes IF Hotel Resort = $10,320 (B)
Difference Between B and A = $7,520 (C)
C x 10% = $752 (D)
C + D = $8,272 (E)
Fiscal 2019 Total Assessed Value = $835,000.
Fiscal 2019 Property Taxes Paid or Due = $2,922 (F)
Fiscal 2019 Property Taxes IF Hotel Resort = $11,606 (G)
Difference Between G and F = $8,684 (H)
H x 10% = $868 (I)
H + I = $9,552 (J)
Total Penalties Due (E + J) = $17,824.
In case an owner applied for the Dedication to Residential Use prior to Sept 1st and was granted Residential Status on Oct 1st, but sold the property prior to July 1st of the following year (July 1st being the date the Residential tax rate will start) and the new owner contacts the Real Property Assessment Division prior to July 1st it is not 100% clear if the new owner will face any penalties. In speaking with the assessment office it sounded like there probably would not be a penalty, but it also sounded like they may not have had such cases and therefore we couldn’t get a crystal clear answer.
We hope this post brought some clarity on the property reclassification topic. We welcome any thoughts, questions or comments below.
Disclaimer: The information is deemed reliable, but not guaranteed, and should not be relied upon in deciding to purchase, sell and / or reclassify a property. Always verify any and all information before making a decision. Rules, regulations, tax rates, tax laws, zoning laws, condo governing documents, etc. are subject to change.