The County Council Finance Committee on Tuesday deferred a bill that would create a new long-term rental class for property taxes to a later meeting to further discuss ramifications of the proposal.
Bill 104, introduced by council members Jenn Kagiwada and Michelle Galimba, would create the new tax class for long-term rental property occupied under a signed lease for 10 consecutive months or more to the same tenant.
The proposed long-term rental tax rate would be 130% of the affordable rental housing tax rate, which currently is $6.15 per $1,000 net taxable value.
Testifiers spoke against the bill.
Johnathan Helton, policy researcher at the Grassroot Institute of Hawaii, testified his organization generally supports a new property tax for long-term rentals. However, a couple of things need to change before the bill moves forward.
“The bill’s provision that states that properties used for commercial use cannot receive the exemption,” he noted. “We propose if a building is used for commercial uses and there is a long-term rental on the property, the portion of the building used as a long-term rental may receive the class and tax rate.”
He also brought up the provision that a homeowner who has a long-term rental on their property would not be eligible for the lower rate, but if they did want to enter into the long-term rental class, the tax rate would be higher than the homeowner rate.
The Real Property Tax office provided insight into the tax rates.
Using a three-bedroom, three-bath home in East Hawaii as an example, the property tax for a residential classification would be about $5,500 annually compared to the affordable housing rental classification tax rate for the same property dropping down to about $3,000. The owner of the property could charge a maximum rent of $2,124 per month.
If that same property chose to go into the long-term rental classification with no cap on rent, the tax rate would be about the same as the residential class, but if they were in the affordable housing rental classification and decided to change to the long-term classification, they would pay about $900 more in real property tax but not be held to a rental cap.
“The overall intent and purpose of the legislation is to get those homes that might be second homes that people may not be living in and have them starting using them for long-term rentals,” said Councilwoman Rebecca Villegas. “My concern is it appears, since these are second homes billed at the residential rate, provides them an opportunity to join in a long-term rental tax class, which in the long run increases the tax rate for everybody else. While we are getting homes into the inventory, we are accidentally raising taxes on these other classes.”
Council member Sue Lee Loy was worried the creation of a new classification could lead to tax shelters.
“Certain individual who don’t want to pay the high residential class can rent out for six months and one day and now its a tax shelter for them,” she said.
Council member Holeka Inaba was against the bill in its current form.
“I think this has more potential to hurt people in my community than help. If I was a property owner right now using the example of in West Hawaii for a four bedroom two and a half bath , if it was an affordable rental I would be taking in about $30,000 per year in rent, but if I rent at market, we can call it $60,000 per year. I certainly would be jumping over to this because I’m going to be making $30,000 more a year on rent and I’m going to be saving on my property tax,” he said.
“If someone is doing a short-term rental and they are going to save $1,500 a year by switching to long-term rental is not going to be enough of a carrot because those houses are renting for $100-200 a day. They can make that in a week,” said council member Matt Kanealii-Kleinfelder.
In the end, council unanimously agreed to continue the conversation and present a new amended version of the bill at the Jan. 23 Finance Committee meeting.
