– A number of Honolulu condos are located on land that is zoned for hotel/resort use. We refer to these condos as ‘condo hotels’ or ‘condotels’ because they could be used for both, ‘residential’, or ‘hotel/resort’ use.
‘Residential use’ means the property serves as your principal residence, your 2nd home / vacation home, or as a long-term rental with rental terms of 30-consecutive days or more per tenant.
‘Hotel/resort use’ means the property rents as a short-term rental with rental terms shorter than 30-consecutive days per tenant. Short-term vacation renting could potentially generate higher rental income compared to long-term renting. It might also provide greater flexibility for personal use between guest bookings.
Honolulu City Council recently adopted Ordinance 17-013 where condos that are permitted for both ‘residential’ use and ‘hotel/resort’ use will automatically be taxed at the higher hotel/resort property tax rate of 1.39% of assessed value, instead of the lower residential tax rate of 0.35% of assessed value.
Also see related article: Honolulu County Property Tax Rates
However, you could have the higher resort/hotel property tax rate reduced to the lower residential rate by filing the ‘Petition To Dedicate Certain Property For Residential Use (5 Year Dedication)’
But reducing your property tax rate by ‘dedicating for residential use’ comes at a price: You give up your right of renting your property as a short-term vacation rental.
What is unique with the new rule?
If the City approves your petition:
1.) The new dedication will be reflected on your October 1st assessment notice and remains valid for 5 years.
2.) The new dedication automatically renews for the next 5 years, unless:
- If you cancel the dedication in writing by September 1st in the 5th year, the dedication will not be renewed.
- If the property sells, the dedication continues until the completion of the most recent 5-year dedication period and automatically cancels at that time.
However, the new owner may apply by September 1st in the 5th year for the City’s approval to continue the dedication.
3.) You give up the right to ‘change the use’ for at least 5 years.
4.) If you violate the use restriction, the dedication is cancelled retroactive including the full tax year prior to the violation. You will be charged back taxes including the full fiscal year prior to the violation, equal to the difference in tax rate, plus a 10% penalty.
5.) This ‘Residential Use Dedication’ replaces the previously used ‘Declaration Regarding Condominium Use’, now considered invalid.
6.) A Home Exemption will no longer automatically qualify a property for a classification as Residential.
Go figure and be in the know!
How does it affect me?
1.) If you own a Honolulu condotel, e.g. the Ilikai, Ilikai Marina, Waikiki Shore, Luana Waikiki, or Trump Tower Waikiki, etc. and, for the next 5 years (!) you do not plan on renting your unit as a short-term vacation unit for less than 30 days per tenant, then you may apply for the residential dedication and claim the lower property tax rate.
2.) If you use the unit for short term vacation renting while the 5-year residential dedication is in place, you will be charged back taxes including the full fiscal year prior to the violation, equal to the difference in tax rate, plus a 10% penalty.
Click here to download the Petition form and file by September 1st.
Click here to read the Ordinance.
It appears the city is trying to reduce work load and increase revenue at the same time. The higher tax rate could be triggered for unassuming owners that have had previously filed a ‘Declaration Regarding Condominium Use’, which will now be void.
A full fiscal year retroactive back taxes could mean 12 to 24 months additional taxes, depending on the timing, plus the penalty adds up to some significant bucks. This could catch some people by surprise.
The burden is on the home owner to keep current. That’s why we write this blog! Sign up for updates 😉
— Here is a copy of the City letter mailed to about 8,000 Honolulu property owners on 7/7/2017:
Other news from the Honolulu Real Property Tax Division here: https://www.realpropertyhonolulu.com/whats-new/
For all legal matters, always check with your favorite qualified professional legal counsel.
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