Landlord/Tenant Q&A: DARLENE HIGA (RA), MPM, RMP

DARLENE HIGA (RA), MPM, RMP
Property Manager,
Property Profiles, Inc.
Past President, Oahu Chapter
National Association of Residential Property Managers

Q. I own a property on Oahu that has a home on it but it is on business zoned (B-2) land. I just got a notice that I must file a dedication form for residential use or my taxes will go up. I also heard from my friend that if my rental property is over $1,000,000 in value, my taxes will go up by 3 times the current rate. Can you tell me what is going on?

A. You are citing two different property tax issues in your letter. The first one centers on the zoning of your property. If you have a property that is being used as a residential unit but is zoned other than residential (i.e. business, industrial, hotel-resort, etc.) you can file for a 5-year exemption with the Real Property Assessment Division. If granted, you would be able to pay residential property tax rates (currently at $3.50) vs. the higher tax rates for other land uses (i.e. $12.40 commercial and industrial, $12.90 hotel/resort) for the next five years. The forms must be submitted by Sept. 30, 2017 to receive the lower rates from next year. The form can be acquired at www.realpropertyhonolulu.com, click on Forms > Dedication Forms > Dedicate Certain Property for Residential Use. As you can see, the differences in rates are substantial and may be where your friend is getting the “3 times” the current rate difference.

The second issue revolves around the new “Residential A” classification of real property. ROH 8-7.1(i) provides that a property shall generally be classified as Residential A if it has an assessed value of at least $1M, has no more than two dwelling units, is zoned for residential use or is a condominium unit, and has no home exemption. Residential zoned vacant land with an assessed value over $1 million also falls under this classification. The current rate for Residential A is $6.00, but there is a current resolution (17-70) that will establish a new rate structure of $4.50 for the first $1 million of assessed value, followed by a rate of $9.00 for values over $1 million. The rates are not set and may be adjusted depending on whether the City is able to get tax increases from other sources.

Another provision that affects taxpayers is ROH 8-10.5(a)(2) which provides that no home exemption shall be allowed to any corporation, co-partnership, or company (LLC included). ROH 8-10.5(a)(2) provides a solution for homeowner-occupants to be allowed to still claim the home exemption if a property is owned by an LLC if the property is leased to the individual in such a way as to allow the individual to then claim the home exemption. The requirements of the lease are: (a) The property described in the lease (generally defined with an Exhibit A) must include the entire residential building; (b) The lease must be for a term of 5 years or more for residential purposes; (c) The lease must be recorded at the Bureau of Conveyances by Sept. 30 preceding the tax year for which the exemption is to be claimed; and (d) The lessee must be the obligated taxpayer during the term of the lease.

It would be prudent to make the lease automatically renewable until cancellation is recorded (and/or upon the death of the lessee), so that the home exemption won’t be removed in 5 years. Often owners and lessees forget to record a lease extension causing the exemption to be removed upon the lease termination date.

Another provision under ROH 8-10.4(a) provides that a property owned by a trust may receive the home exemption if certain requirements are met. The trustee or fiduciary is entitled to apply for and claim the home exemption for the property if: (a) The settlor of the trust occupies the property as his/her principal home; or (b) The settlor has died, and a beneficiary entitled to live in the home under the terms of the trust lives there as his/her principal home.

If the name of the trust is vague – i.e. The Smith Family Trust, you may need to submit copies of the trust to determine who the settler is.

As you can see, submitting for a home exemption to be excluded from Residential A classification as well as requesting for an exemption for residential use for nonresidential zoned property will save you a lot of money, so if you fall into these categories, remember to file before September 30th.

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