Landlord Tenant Q&A with LAURENE H. YOUNG
LAURENE H. YOUNG, RMP, REALTOR
Young Hawaii Homes, Inc.
2011 President, Oahu Chapter
National Association of Residential Property Managers
Q. I became a new landlord this year. What do I need to do regarding my taxes? And what else do I need to do? I also got an insurance settlement for damage caused by a leak into my unit. Do I need to spend it all or can I just keep it?
A. Welcome to the world of property management. Check with your tax advisor for specifics in your case, but I will provide general information for the typical cash basis taxpayer.
If you just bought the rental property, your accountant will need a copy of your closing statement from the sale. Costs associated with the sale, including title insurance, legal fees, mortgage fees, and other costs are added to the cost of the property. This is the amount that is used for depreciation purposes.
These costs are not immediately deductible this year, but are typically depreciated over 27.5 years.
If you spent money to prepare the property for rent, keep those receipts.
Also keep copies of your homeowner’s insurance and property tax payments.
You can also deduct maintenance fees, advertising costs and the cost of repairs paid to a third party. You cannot deduct the labor costs for repairs done by yourself. If you used a rental agent, lawyer or accountant relative to your rental business, you can deduct those costs.
You should have applied for a general excise tax number from the State of Hawaii. Go to the website at www.state.hi.us/tax and navigate to the form BB-1 to apply for a general excise number. You will be paying 4.5% of your gross rental income (4% on neighbor islands). Your payments are due monthly if you are paying more than $4,000 a year in GE tax, quarterly if you are paying less than $4,000 a year, or semi-annually if you are paying less than $2,000 a year. Note: If you are doing vacation rentals or other short term rentals, you need to pay an additional Transient Accommodations tax (9.25% on all islands).
All rents and other fees received in the year should be reported even if they were paid in advance. The total rents and fees must be reported on the general excise report, without deducting any fees paid to your property manager or costs for repairs, etc. Do not include security deposits or pet deposits as rental income if you plan to return it to the tenant at the end of the lease. Rents would also include the value of services provided by your tenant; for example, if your tenant is a painter and painted the unit in lieu of rent, you would have to include the value of that service as rental income.
If you have an insurance claim for damage caused to your unit, the insurance adjuster will investigate the claim and authorize payments. If you find a cheaper alternative for the repair, you might not have to spend all the money. However if you do not use all the insurance money for its intended purpose, you must declare the excess as income.
If you just converted your previously owner-occupied home into a rental property, you should remove the homeowner’s exemption. Individual owners (not corporations or companies) can exempt on their taxes up to $80,000 on a home that is their principal place of residence. There are additional exemptions available to homeowners over the age of 65, low income taxpayers, certain disabled taxpayers and non-profit groups, among others. Some of the criteria used to determine occupancy for exemption purposes require that the homeowner claiming the deduction occupy the home for more than 270 calendar days of a calendar year, register to vote in the city, and file an income tax return as a resident of the State of Hawaii. Since this property is no longer owner-occupied, you do not qualify for an exemption. You can visit the City & County of Honolulu website at www.realproperty-honolulu.com to remove the exemption.
Your taxes just became more complicated, so I recommend that you discuss your specific situation with your attorney or tax professional.