Hawaii tax amnesty could turn STRs into long-term rentals

HB2416/SB3105 would exempt qualifying short-term rentals in Hawaii from conveyance tax when the property is sold to an individual that:

• Is not an immediate family member of any owner of the property,
• Does not have a direct or indirect ownership interest in the property,
• Does not have a direct or indirect ownership interest in any other real property, and
• Intends to immediately occupy the property as the individual’s primary residence for at least two years

To qualify for this exemption, a property must have been furnished as a transient accommodation from January 1, 2023, to June 30, 2024, and have a value of not more than $2 million. All outstanding taxes for gross income, gross rental, or gross rental proceeds received for furnishing the property as a Hawaii short-term rental must be paid.

The bills originally provided an income tax exemption for capital gains realized from the sale of qualifying Hawaii short-term rental properties in addition to the conveyance tax exemption. However, the income tax exemption was struck. 

SB3105 would also establish a one-time tax amnesty program that would waive criminal prosecution, fines, penalties, and interest related to general excise tax and transient accommodations tax for qualified owners who convert eligible properties to long-term rentals. The Senate bill has been stuck in committee since January 2024, while the House bill has progressed.

The governor also promised to provide a temporary property tax exemption for STRs on Maui that are converted into long-term housing. His administration worked with Maui County officials to make that happen. 

Maui County already provided a partial property tax exemption for long-term rentals.

Under Maui County Council Bill 131, approved in December 2023, short-term rentals leased for long terms by February 1, 2024, qualify for an 18-month property tax exemption. STRs converted into long-term rentals and leased by March 16, 2024, qualify for a property tax exemption for the next fiscal year.

Under Bill 95, Hawaii short-term rental owners that rent their properties to tenants displaced by the August 2023 wildfires for at least six months, but less than 12 months, by January 31, 2024, qualify for a partial property tax exemption. The amount of the exemption is based on the value of the property.

Whether or to what extent such tax incentives will lead to a sufficient increase in housing stock and reduction in housing prices is unknown. 

“In a tight housing market with high prices and barriers to creating new supply, removing supply from the long-term housing market could harm residents by raising housing costs,” observes the University of Hawaii Economic Research Organization (UHERO), which has studied short-term vacation rentals and housing costs in Hawaii. “However, we don’t know exactly how much STRs impact rents and home prices.”

STRs do make up a “large share of total housing” in Hawaii, especially in certain areas, and UHERO says “the economic logic linking STRs to increases in the cost of housing is fairly unequivocal … it is the size of the impact that is difficult to estimate.”

Affordable housing is essential, of course, but so is tax revenue — and reducing tax revenue in the hopes of securing more housing could have unintended consequences down the road. “Increasing affordable housing is so important to the state they’re will to spend current money to reduce future money, doubling down on negative money,” says Scott Peterson, VP of Government Relations at Avalara. 

“Converting short-term rentals to long-term rentals will decrease tax collections from short-term rentals as well as property tax revenue,” adds Pam Knudsen, Senior Director of Compliance Services at Avalara. “The assumption is these houses will be affordable for those needing housing."

It’s a big assumption. 

There is “quasi-experimental evidence” from Los Angeles County that STR ordinances can reduce STR listings by 50%, housing prices by 2%, and rents by 2%. Using this and other research, UHERO estimates median home prices on Oahu would be 4%–6% lower than they currently are if there were no STRs on the island. 

Even so, UHERO admits “Oahu would still suffer from extremely high home prices.”  

Hawaii has the most regulated housing market in the country, according to the Legislature. “Various studies have also concluded that housing regulations slow the rate of construction and lead to higher prices.” So while regulating STRs could help curb the high cost of housing, the state will likely need to use other tactics as well. 

House Bill 1630, which would prohibit county zoning ordinances from not allowing two or more additional dwelling units on an urban residential lot, offers one possible alternative. But some lawmakers in Hawaii are still trying to restrict the number of vacation rentals in the state.

Two bills moving forward in the Legislature, SB2919 and HB1838, would give counties more control over regulating — even banning — short-term rentals.

Several versions of the bills have been introduced, and the House and Senate have yet to reach consensus on all the details. Broadly speaking, the bills would allow counties to 1) regulate the time, place, manner, and duration of uses of land and structures, and 2) amortize or phase out transient accommodations in residential or agricultural zoned areas.

They would also add “vehicles with, or advertised as including, sleeping accommodations” to the definition of “transient accommodations.” Meaning they would be regulated and taxed as such.

Both bills begin with a reference to the holding in Hawaii Legal Short-Term Rental Alliance v. City and County of Honolulu, which prevented Honolulu from implementing a short-term rental ordinance prohibiting 30- to 89-day home rentals in any district on Oahu. 

“It is the legislature’s intent to honor and wholeheartedly support the home rule authority provided to the counties relating to zoning,” the bills read, “to ensure that the counties are able to ‘guide the overall future development’ of their local jurisdictions in a manner they deem fit.” 

If either of the bills is enacted, it will almost certainly be challenged. This is a contentious issue even among Hawaiians. 

Those in favor of limiting or banning short-term rentals in Hawaii speak of the negative impact vacation rentals can have on housing stock for locals. They note that just over half, or 52% of Hawaii’s 30,000 short-term vacation rentals in the state belong to out-of-state owners, and that 27% of STR owners have at least 20 units. 

But that means nearly half of the state’s vacation rentals are owned by in-state residents. 

Hawaii’s STR owners point out the benefits of the vacation rental industry: The extra income can help owners pay their mortgage; STRs employ 49,000 Hawaiians and generate $4.8 billion in visitor spending, including more than $720 million in tax revenue (e.g., occupancy taxes, property taxes).

Maui’s 13,000 short-term rentals reportedly generated 40% of real property tax revenue (about $214 million) during the 2023–2024 fiscal year — the largest single revenue-generating category of real property tax classifications. It represents 20% of the county’s operating budget.

Reducing the number of vacation rentals in the state would reduce tax collections from STRs. “This lost revenue will have to be accounted for somehow in order to fund services such as road maintenance, rebuilding of public buildings, fire departments, police departments, etc.” says Knudsen. “This cost will be passed on to full-time residents, thereby increasing their overall cost of living.”

Short-term rental units (aka, transient vacation rental properties) are often subject to a higher property tax rate than properties used as long-term housing. In Maui County, for example, the property tax rate for transient vacation rental properties is $11.85 per each $1,000 of the assessed value, which is the second highest of all tax rate classifications in the county. That’s nearly $10 higher than the rate for owner-occupied residential properties.

Meanwhile, Honolulu’s City Council is finalizing a plan to set higher property tax rates for short-term rentals, like Maui has. Property tax collections are the largest single source of Honolulu city and county revenues, and they’re considered the most stable. 

As elsewhere in the state, property tax rates vary by property type and are subject to change. Honolulu has specific property tax rates for 10 different classes, including residential properties, hotels and resorts, and bed-and-breakfasts, but there’s currently no classification for short-term rentals in Honolulu.  

That will change in the 2024–2025 fiscal year. Honolulu is creating a new classification — and new property tax rate — for short-term rentals. The property tax rate for Honolulu’s short-term rentals will therefore increase, but by how much remains to be determined.

Council members are looking to strike the right balance: a high enough rate to fund essential services, but not so high that STR owners will operate under the table. “About a third of short-term rental owners still haven’t registered their properties,” according to the Oahu Short Term Rental Alliance. This is reportedly due in part to uncertainty about the taxes they would owe. 

Never mind that a permit is required to operate a short-term rental in Maui County. Short-term rentals in Hawaii, as elsewhere in the nation, are businesses and are usually subject to registration and lodging tax requirements. 

Navigating changing STR ordinances and tax obligations are just some of the hurdles lodging and hospitality businesses must overcome. To discover more, read the lodging tax changes chapter of the Avalara Tax Changes report.