Taxes....Auwee!

Ownership of real property involves taxes. Taxes is one of those topics whose mere mention causes people's eyes to glaze over and the mind to shut down. The following is an attempt to demystify the various taxes you are likely to encounter with the ownership of real property, hopefully, without your suffering the glazed eyes and the mental shut down.

Income Tax . Almost everyone is familiar with income tax. This is a tax that you pay on the income you earn. You pay a tax on this income to both the federal government and the state government. If you own real property that generates rental income, income tax is paid on the rental income that you receive. This income may be offset by available deductions for the investment property.

Excise Tax. In addition to income tax in Hawaii , we pay an excise tax on all transactions involving a gain or an economic benefit and which is not a casual sale. A four per cent (4%) tax is charged on such income. There are certain transactions which are exempt by statute.

Real Property Tax. When you own real property, you are likely to pay real property taxes on the properties you own. This is a tax assessed by the county where the real property is located and is a primary source of income for the county. The amount of tax you pay is determined by multiplying the County's assessment of the value of your property by the tax rate the county is charging. The real property tax is paid each year in two installments.

As we discussed in prior newsletters, if the real property is also your place of residence, you are entitled to claim a homeowner's exemption for the real property. The homeowner = s exemption excludes some of the property's value from taxation. The amount of this exemption increases with your age. If you have a mortgage, your lender will typically collect an estimated amount each month to pay for the real property taxes. The monthly payment is typically part of your monthly mortgage payment. The collected funds are placed in a reserve account to ensure there is money to pay the real property taxes when they are due.

Conveyance tax. This is a tax imposed by the State of Hawaii on transfers of real estate or any interest in realty. The conveyance tax is presently calculating by multiplying .001 times the value of the sale. For example, for a transfer of property with a sales price of $400,000, the tax would be $400. The seller of the real property is the party who owes this tax. The tax is typically collected by escrow. Certain transactions, such as transfers between husband and wife, between parents and child, a transfer due to death or a transfer to one's revocable trust are statutorily exempt from this tax. There has been much discussion recently about increasing the conveyance tax beginning July, 2005 to generate funds to help pay for mass transit.

Estate tax . This is a tax imposed by the federal government on the taxable value of the property owned at the time of one's death. This property is called the decedent's estate. All property in which the deceased owned an interest are included in the decedent's estate, subject to certain exclusions. The estate tax is calculated on the total taxable value of the decedent's estate. People who anticipate having a large estate often do estate planning to minimize this tax.

Inheritance tax. This is a State tax imposed on heirs for the property they inherit. The State of Hawaii 's inheritance tax is rather modest compared to the federal estate tax. Therefore, most of the tax planning is directed at reducing the federal estate tax.

Transient accommodations tax. We are a resort destination. There are people who come to Hawaii and stay for periods of time that are less than 180 consecutive days. This is a tax imposed by the State of Hawaii on the income derived from such short term rental. For example, it is a tax imposed on hotel rental pools, apartment rooms and cooperatives in which the residency is less than 180 days. Certain rentals are exempt by statute.

FIRPTA. This is not really a tax, but is a withholding from the gross sales proceeds to pay for federal taxes on the gain you receive. Sellers of real property, who are not citizens of the United States are subject to a withholding of 10% of the gross sale proceeds. Thus, for a $400,000 sale, the FIRPTA withholding would be $40,000. The withholding is a means of collecting possible taxes owed at the point of sale. The buyer is liable if the withholding is not done. Therefore, escrow is generally automatically instructed to withhold the appropriate amounts. The withholding can be modified with documentation and filings well before the sale closes. This requires a little bit of prior planning on the seller's part.

HARPTA . This is the State of Hawaii 's version of the withholding from the gross sales price to pay the State taxes on the gain you receive. This amount is typically withheld by escrow from the gross sales proceeds whenever the seller is a non-resident of the State of Hawaii . The amount of the withholding is 5 % of the gross sales proceeds. This withholding is to ensure the State of Hawaii collects the taxes owed to the State of Hawaii . Again, the seller can possibly influence the amount withheld by providing proper proof and documentation to the State of Hawaii Tax Office . This again should be done well before the closing date.

For non-citizens, the combined HARPTA and FIRPTA withholdings can be substantial. For example, for a non-citizen who sells a property for $400,000, the combined state (5%) and federal (10%) withholding would be $60,000.

The foregoing is a very basic explanation of various taxes you are likely to encounter with the ownership of real property. Taxes should not discourage you from owning real property. Most real property owners, especially in recent years, will agree the benefits of real property ownership far outweigh any potential tax concerns.

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Tips on Keeping Illegal Activity Out of Rental

1) Use lighting to its best advantage;

2) Keep bushes around windows and doorways well trimmed;

3) Control traffic flow;

4) Quickly remove graffiti;

5) Repair vandalism immediately; and

6) Keep the exteriors always looking clean.

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Free Credit Report

Consumers in Hawaii have been paying up to $9.00 per credit report from Equifax, Experian or Trans Union , the three major credit reporting agencies.

Under a new law, you can now request a free copy of your credit report from each credit reporting agency once each year. This requirement of the credit bureaus is being phased in nationally starting with the western states and moving eastward. Since Hawaii is a western state, Hawaii residents can now request a free copy of their credit report. This benefit will be available for those residing in eastern states later this year.

As we indicated previously, many services will provide you the free credit report, but also require that you purchase other services or products. You can get a free credit report with no strings attached at www.annualcreditreport.com. This a website that is sponsored by the three major credit reporting agencies. At the site, there is also a process for disputing any errors on your credit report. A link to this Website can be found at the Links and Resources section of our Website, www.attorneyhawaii.com You can also secure a free credit report by calling 1-877-322-8228.

One service that is offered which potential buyers may be interested in is that for a small fee you can also order your credit score. You can also order your credit score by phone at 1-877-726-7311. Being aware of the details of your credit report and knowing your credit score beforehand can be important as you go house hunting or seek refinancing.

We recommend that you check your credit report on a yearly basis, especially since you can now do this for free. This will allow you to 1) discover errors that you may want to correct, 2) learn who is making inquiries about your credit history, and 3) possibly take action if your credit is not as desirable as you like and you wish to improve it.

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From the Desk of Harold Chu

In this issue, we included some information as to why we strongly believe a condominium owner should have their own individual homeowner's insurance. The cost of homeowner's insurance is very modest compared to the risks that are covered. The reason this has been a concern recently is that we are finding that it is not uncommon to find condominium homeowners trying to avoid the cost of homeowners insurance by claiming the association's policy covers them. This unfortunately is often not the case and could potentially have very adverse financial consequences for the individual condominium homeowner. This is why we recommend that each condominium homeowner secure their own homeowner's insurance coverage. A potential substantial financial disaster can be avoided at a relatively modest expense.

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No one likes to talk about taxes. It's boring, not easy to fathom and simply not fun. If you own real property, there is a reasonable likelihood you will encounter some form of taxes. We have tried to provide a basic explanation of various taxes you are likely to encounter as an owner of real property.

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One's credit rating is important if you are involved in any type of financial transaction. A new law requires the three major credit agencies to each provide you once a year a copy of your credit report. We have provided details in this newsletter and a link on our Website on how to secure a free credit report.

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In future newsletters, we expect to have some information about the new condominium law that is scheduled to go in effect on July 1, 2005 and hopefully some suggestions and tips for sellers and buyer from various real estate professionals.

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Have a safe and happy summer!

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Should a Comdo Owner Buy Insurance

One of the questions that is occasionally asked by owners of condominiums is whether they should purchase individual homeowner's insurance. The reason this question is being asked is that condo owners are being told that since the Association has to have insurance, it is unnecessary for the individual condominium owners to have their own insurance. This is very bad advice.

It is your decision whether or not you, the apartment owner, choose to purchase homeowner's insurance for your condominium. We recommend that you purchase insurance for your condominium . Some of the reasons we make such a recommendation are as follows:

1. The Association's insurance policy does not cover the individual homeowners in every situation. It typically does not cover the individual apartment owner if someone gets injured within the owner's apartment and may not provide any coverage if the personal contents of the owner's apartment or some other owner's apartment is damaged. Who is at fault often determine who pays the damages. Determining who is at fault can be quite expensive. In addition, when there is water damage to an apartment, the amount of the damages is often substantial.

2. Many Associations are buying policies with increasingly larger deductibles to minimize the costs of the association's insurance policy. The individual homeowners is often responsible for paying the deductible portion when there is a claim. An association I represent is contemplating a deductible of ten thousand dollars. Imagine if you personally had to write a check for the amount of that deductible.

3. One of the most expensive aspect of having to deal with a problem involving property damage will likely be the attorney's fees in any prospective litigation. The Association's policy does not necessarily cover the individual homeowner's attorney's fees.

4. Homeowners insurance is relatively inexpensive , especially when compared to the potentially large amounts the homeowner may have to personally pay.

Our office has handled several cases involving water damages in condominium buildings and individual homeowners who did not have their own insurance. The owner at fault generally has to personally pay 1) for all the damages caused, 2) the attorney's fees for the party who suffered damages, and 3) their own attorney's fees and costs. In one case, the amount was over $40,000.

A homeowner's insurance policy is relatively inexpensive. It is not unusual for the damages or the out-of-pocket costs to be several thousands of dollars. It's your choice whether to have homeowners' insurance. When deciding whether you should get insurance, you may wish to ask yourself A Do I feel lucky? @ .

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Who's Living Near You?

One of the most heavily visited website was the State of Hawaii site which listed the names, addresses, convictions and pictures of registered sex offenders.

This site was taken down for several years following a Hawaii Supreme Court ruling. It is now up again after certain legislative revisions. The site is www.state.hi.us./hcjdc/sexoffender.htm . You can also access this site through the Links and Resources section of our Website, www.attorneyhawaii.com .

If you would like to receive a copy of the statutory provisions which gave rise again to this Website, send us a stamped self addressed envelope with postage of $1.60. Please also include a check for $1.50 for photocopying and handling.

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Humor

Two friends were discussing their family histories when one of them lamented that he knew precious little about his roots. "I've always wanted to have my family history traced," he said, "but I can't afford to hire someone. Any suggestions?"

"Sure," replied his friend. "Run for public office."