Honolulu law changes property tax category for short-term rentals

Some Honolulu short-term rental hosts may pay higher property taxes under a new law signed by Mayor Kirk Caldwell.

The measure creates a new property tax classification for “bed and breakfast homes,” which are properties rented out for short terms while the owners are present. These homes will be taxed at the new bed and breakfast rate rather than as residential properties.

Tax rates are set every year by the City Council. Currently, residential properties pay $3.50 per $1,000 of assessed value, but the council is expected to establish higher rates for the bed and breakfast category.

The new law also places unhosted short-term rentals, known as “transient vacation units,” into the existing hotel/resort property tax category. These types of rentals are largely prohibited in residential areas under a strict new short-term rental law passed this summer by the City Council. At the time the law was passed, it was estimated that approximately 10,000 unhosted short-term rentals were operating on Oahu.

“This bill carries out the next phase of the city’s ordinance that is successfully clamping down on illegal short-term vacation rentals,” Caldwell said in a statement. “This next phase allows 1,700 hosted short-term vacation rental units to be registered and permitted starting in October 2020.”

While all property owners must pay the property tax rate that corresponds with their category, short-term rental operators are also responsible for complying with lodging tax requirements.

Short-term rental income in Hawaii is subject to transient accommodations tax (TAT) as well as general excise tax (GET). Vacation rental operators can pass these taxes on to guests, but hosts must register with the state, collect and pay the taxes, and file regular tax returns. 

While short-term rental platforms such as Airbnb and HomeAway/Vrbo collect taxes on behalf of their hosts in many states, they are not allowed to do so in Hawaii. That means hosts must take care of lodging taxes themselves. MyLodgeTax automates lodging taxes for Hawaii vacation rental operators to simplify compliance.

A recent data-sharing agreement between Airbnb and the state will make it easier for tax officials to enforce lodging tax laws. Under the deal, Airbnb will share records with the state identifying 1,000 Hawaii hosts who made the most revenue from 2016 through 2018. Airbnb will also provide anonymized information on hosts who brought in more than $2,000 annually during that time. The state may request individualized information on these hosts from Airbnb, but may only receive data on 500 operators every two weeks.

In Hawaii, short-term rental taxes are administered by the state, while counties regulate short-term rental operations. It’s been difficult for the state to enforce the tax laws due to a lack of data on short-term rentals. While state law requires short-term rental listings to include taxation identification numbers, more than 70% of Hawaii Airbnb listings do not include these.

For more on lodging taxes in Hawaii, see our state Vacation Rental Tax Guide. If you have tax questions related to vacation rental properties, drop us a line and we’ll get back to you with answers.