Important Note: This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Hawaii property tax rules, conveyance tax rates, and withholding requirements are subject to change and vary based on individual circumstances. Buyers and Sellers should consult a qualified Hawaii real estate attorney, CPA, or tax advisor before making decisions based on any information contained here.
One Decision That Affects Multiple Tax Outcomes
When a Buyer closes on a property in the Kona luxury real estate market, one of the decisions they make, often without fully understanding its downstream implications, is how to take title.
Personal name. Revocable living trust. LLC. Partnership. Each structure has legitimate uses and genuine advantages in the right context. But in Hawaii, how you take title directly affects your property tax tier, your conveyance tax rate on a future sale, and your eligibility for the county homeowner’s exemption. It also has implications for HARPTA withholding when you eventually sell.
This is not a decision to make at the closing table based on a quick conversation. It is a decision to make early, with qualified legal and tax counsel, because unwinding it later is complex and can be costly.
Personal Title: Simplest Path to the Homeowner’s Exemption
Taking title in your own name is the most straightforward path to qualifying for the Hawaiʻi County homeowner’s exemption, which places your primary residence in the lower $11.10 per $1,000 property tax tier rather than the non-owner-occupied rate of $13.60 per $1,000.
For a Buyer purchasing a home as a principal residence on the Big Island, personal title is often the most tax-efficient starting point, assuming the property is actually used as a primary home and the exemption is filed with Hawaii County within the required window. The tradeoff is that personal title offers limited liability protection and can expose the property to claims against the owner personally.
Revocable Living Trust: Estate Planning Without Sacrificing Exemption Eligibility
A revocable living trust is the most commonly used alternative to personal title for Buyers who want estate planning benefits without sacrificing homeowner’s exemption eligibility. According to Hawaii’s conveyance tax FAQ, the lower owner-occupant conveyance tax rate can still apply when a property is held in a revocable living trust, provided the settlor occupies the property as their principal residence. This is explained clearly in the Hawaii Living conveyance tax guide. The same principle generally extends to the county homeowner’s exemption, though Buyers should confirm specific county requirements with a Hawaii attorney.
The revocable trust avoids probate, allows the Buyer to maintain control of the property during their lifetime, and simplifies the transfer of the property at death without going through the court process. For many Buyers in the Kona luxury real estate market, this is the structure that balances tax efficiency with estate planning effectiveness most cleanly.
LLC Title: Privacy and Liability at a Tax Cost
LLCs are commonly used by Buyers who prioritize liability protection, privacy of ownership, or separation of the property from their personal estate for business or investment reasons.
The tradeoff in Hawaii is significant. Taking title in an LLC generally disqualifies the owner from the county homeowner’s exemption and from owner-occupant treatment for conveyance tax purposes. This means the property is taxed at the higher non-owner-occupied property tax rate, currently $13.60 per $1,000, and potentially subject to the proposed new third tier if the property value exceeds $4 million.
For a second home, a vacation rental, or an investment property, the LLC structure may still make sense despite these costs, because the property was never going to qualify for owner-occupant treatment regardless. But for a Buyer intending to use a Big Island property as a principal residence, taking title in an LLC and forfeiting the homeowner’s exemption is a meaningful and potentially unnecessary cost.
What the Right Structure Depends On
There is no universally correct answer to how title should be taken on a Kona luxury property. The right structure depends on the following considerations, all of which a Hawaii real estate attorney and CPA should evaluate for each Buyer individually, before closing:
- Whether the property will be used as a primary residence, secondary home, or investment property
- The Buyer’s residency status for Hawaii tax purposes
- Estate planning goals and the composition of the Buyer’s broader asset portfolio
- Liability exposure concerns and the Buyer’s risk profile
- Whether the Buyer is a US citizen, US resident, or foreign person under FIRPTA
- The anticipated holding period and future sale plans
Marco’s Role in This Conversation
Marco A. Silva does not provide legal or tax advice. What he provides is the experience to know when these questions matter and the professional relationships to connect Buyers with the right advisors before the decisions are made. To learn more about how Marco approaches the purchase process for his clients, visit the Marco In Kona about page. If you are considering a purchase in the Kona or Kohala Coast market, contact Marco A. Silva to start the conversation.
Sources
Hawaii Living: ‘Hawaii Conveyance Tax Peculiarities – Save $Thousands In Taxes’
Big Island Now: ‘Proposed new Hawaiʻi County tax rate for luxury second homes passes first reading’
Hawaiʻi Life: ‘Demystifying HARPTA and FIRPTA: What Real Estate Investors Need To Know’
Frequently Asked Questions: Title Structure and Hawaii Real Estate Taxes
Can I qualify for the Hawaii homeowner’s exemption if my property is in a trust?
Generally yes, if the property is held in a revocable living trust and the person who created the trust occupies the property as their principal residence. The homeowner’s exemption and owner-occupant conveyance tax treatment are typically available in this structure. Buyers should confirm specific eligibility requirements with Hawaii County and a Hawaii attorney.
What happens to my property tax rate if I take title in an LLC?
Taking title in an LLC generally disqualifies the property from the Hawaiʻi County homeowner’s exemption, which means the property is taxed at the higher non-owner-occupied rate ($13.60 per $1,000 under current rates) rather than the owner-occupied rate ($11.10 per $1,000). For properties over $4 million, the proposed new third tier could also apply.
Does title structure affect the conveyance tax when I eventually sell?
Yes. The conveyance tax rate on a sale can be affected by the owner-occupancy status of the Seller, which is in part determined by how title was held and whether the owner-occupant exemption applied. An LLC holding that was not eligible for owner-occupant treatment may face a higher conveyance tax rate at sale.
Is an LLC ever the right choice for a Kona luxury property?
Yes. For second homes, vacation rentals, investment properties, and situations where liability protection or privacy of ownership are primary concerns, an LLC can be the appropriate structure despite the higher property tax rate. The question is whether the benefits of the LLC structure outweigh the tax costs in your specific situation, a determination that requires qualified legal and tax advice.
When should I decide how to take title on a Big Island property?
Well before closing, ideally during the negotiation and due diligence period. The title structure decision affects not only closing documents but your ongoing tax obligations, estate planning, and future sale implications. Engage a Hawaii real estate attorney and CPA as early in the process as possible.
Important Note: This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Hawaii property tax rules, conveyance tax rates, and withholding requirements are subject to change and vary based on individual circumstances. Buyers and Sellers should consult a qualified Hawaii real estate attorney, CPA, or tax advisor before making decisions based on any information contained here.