Comparing vacation properties and the many ways you can get your hands on a vacation property.
Condo Hotel
How it works: You buy a room in a hotel. The hotel operator can rent out your room to guests when you aren’t using it, and you share that revenue.
▪ Advantages: You can use the property when you want, and get some rental income at other times which can cover part of your expenses, such as maintenance and a mortgage. Condo hotels have the amenities of a hotel, such as room service.
▪ Disadvantages: You can suffer from the vagaries of the hotel business: If your room isn’t rented out, then you don’t collect income. In many cases, you can’t decorate your own unit.
Timeshare
How it works: You buy the right to occupy a vacation property for a few weeks of the year.
▪ Advantages: You can reduce the cost of a vacation since properties such as these can sometimes be less costly than staying in a hotel.
▪ Disadvantages: Unlike condo hotels, you don’t get any income from a timeshare. They also have a mixed history when it comes to resale, and some have been resold at a loss.
Fractional Ownership
How it works: Like a timeshare, you buy the right to occupy a vacation property, though typically you can use it for a longer period of time than a timeshare.
▪ Advantages: You can stay in an often upscale vacation spot for less money than buying a home there. The resale value has value has been fairly strong in high-end markets.
▪ Disadvantages: You have to share the property with other people. They aren’t typically rented out so there’s no chance for you to get a bit of extra income.
Second Home
How it works: You go out and buy a second home, or a regular condo or apartment, somewhere you ‘d like to vacation or retire.
▪ Advantages: You can use the property whenever you want, and unlike some of the other options here, you get to decorate it as you wish.
▪ Disadvantages: You’re responsible for all of the upkeep, from moving the lawn to cleaning the gutters. And finding tenants if you want to rent it out.
WAIKIKI
Located on O’ahu’s south shore between Diamond Head and Pearl Harbor, today Waikiki is one of the tourism capitols of the world. Waikiki is a place to have fun, eat out, shop, or watch a show. While permanent residents in Waikiki number more than 28,000, over 4.5 million of Hawai’i’s 6 million annual visitors come to O’ahu each year, most of these staying in Waikiki. But it wasn’t always that way. The land that is now home to dozens of resorts, nightclubs, and restaurants was once marshland used for farming taro, rice, and fishponds. Waikiki, which literally means “spouting waters” in Hawaiian, was once a place where ali’i (Hawaiian royalty) came for healing, vacation, and surfing. It also provided many of the most abundant fishing yields in the islands.
Popular Waikiki attractions include the Waikiki Aquarium and the Honolulu Zoo, the ‘Strip,’ or row of shops and restaurants lining Kalakaua Avenue, and of course, the beach! Waikiki Beach is arguably the most famous beach in the world, with thousands of visitors a day arriving to swim, surf, or simply lie out in the sun. Annual Waikiki events such as the Honolulu Marathon, King Kamehameha Day Parade, and more frequent events--such as popular Sunset on the Beach movie showings every weekend--have helped to make Waikiki a destination for locals and visitors alike.
Some historic sites of interest include the Moana Surfrider Hotel, the oldest resort in the area, the Wizard’s Stones of Kapaemahu at Kuhio Beach, and the Waikiki War Memorial Natatorium, a saltwater pool built in honor of World War I veterans.
Waikiki is a place of fusion--where modern amenities, shopping, entertainment and dining meet a rich cultural history and unique tradition of hospitality-all tied up together in the aloha spirit. Courtesy of Honolulu Advertiser.
How Real Property Tax on Oahu is Determined...
Real property, land and improvements. Assessment process is based on comparable values in the area. The tax assessor will look at similar homes and their sales prices. Based on up to five comparables (comps) the assessed value is determined.
Current tax rates for residential properties are $3.29 per $1,000 of assessed value. A $500,000 home on Oahu would have annual taxes of $1,645. On top of that, there’s owner occupant exemptions that knock an additional $80,000 off the tax assessed value or $120,000 for homeowners 65 years and older.
Oahu's assessed values generally lag behind market values. Buy a $500,000 house and there's a good chance its assessed value is $450,000. That's not always the case, your realtor should have that info readily available.
Resort-zoned properties have significantly higher tax rates, currently $12.40 per $1,000 of assessed value. Keep that in mind when looking at condo hotels and vacation rentals.
Foreigner Investors! What you’ll need to understand before buying U.S. Real Estate
Foreign investors buying U.S. real estate require special tax advice because the tax rules are not the same as those facing U.S. residents. The normal transaction practices for real estate — escrow, title insurance, and so forth — are typically new as well. Finding mortgage financing can be troubling because of no credit profile at all in the United States.
Below are definitions leaving out important clarifications and technicalities.
Title decisions
The way foreign buyers take title (individual, foreign corporation, U.S. corporation, or trust, for example) is a serious decision that could affect their ability to transfer the property and the financial and tax implications both during the property’s ownership, and upon sale. Since the method of holding title can affect the tax consequences during life and after death, it is advisable to advise to seek out a competent lawyer or an accountant with an international practice.
Capital Gains Tax on Sales
When the foreign investor eventually sells the property, all capital gain will be taxed at the 15% long term rate (assuming he or she held the property for more than a year). A buyer who is aware of that at the time of purchase can plan accordingly, and may even consider a tax deferred exchange.
FIRPTA (Foreign Investment in Real Property Tax Act)
Under FIRPTA, a buyer must withhold 10% of purchase price if the seller is a non U.S. resident investor. No withholding is required if the seller is a green cardholder (lawful resident); or resident alien (meets either the physical presence test—present in the U.S. for at least 183 days in the current calendar year; or the substantial presence test—present in the U.S. for a weighted average of 183 days over three years).
At the time of purchase, foreign buyers must acquire a U.S. taxpayer identification number (TIN). Waiting until the time of sale to obtain a TIN may cause difficulty recovering money withheld pursuant to FIRPTA.
Leasehold vs Fee Simple
FEE SIMPLE
Fee simple ownership is probably the most familiar form of ownership to buyers of residential property, especially on the Mainland. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer acquires ownership of the entire property, including both the land and building. The fee simple owner does not pay ground’s rent, but does pay real property taxes. The fee simple owner has the right to possess, use, and dispose of the land as the fee simple owner wishes--sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
LEASEHOLD
The leasehold interest is created when a fee simple land-owner enters into an agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of residential leasehold property does not own the land and must pay ground rent. Second, the use of the land is limited to the remaining years covered by the lease. Therefore, the land returns to the fee simple land-owner in a process called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the fee simple land owner.
Questions to ask before you buy leasehold property
➙ How long is the lease term? When is the expiration date, and is there an extension clause?
➙ How much is the lease rent?
➙ When are the lease rent renegotiation dates?
➙ How will the new lease rent be determined?
➙ What are the terms of the surrender clause?
Authorized by the Hawaii State Legislature and the State's Housing Finance and Development Corporation
Income Tax (on income producing property)
Generally, foreign investors are taxed at a flat 30% federal tax rate on gross rental income, unless they make a certain income election on their returns. This election, which allows for deductions for regular expenses before income tax is calculated is commonly known as the “net election.” Further, anyone who collects income for a foreign person and then pays that income is generally required to withhold 30% of gross U.S. source income (such as rent). No withholding is required if the foreign investor has a green card, meets the physical or substantial presence test, or if there is a treaty addressing this issue between the U.S. and that person’s home country.
Foreign Buyer Outside the U.S. at Time of Mortgage Application or Closing
The foreign buyer does not have to be in the U.S. at the time of mortgage application or closing. However, foreign buyer must notarize and validate their identity at a U.S. Consulate in his/her country of residence.
Buyer’s Agent Compensation
In the U.S., sellers typically pay a real estate licensee to market their property. This agreement to pay is required in writing. A buyer’s agent typically receives payment from the seller or from the listing agent.
Courtesy of CIPS Network of the National Association of REALTORS® |
