Hawaii’s mild year-round climate and unparalleled natural beauty make it a potentially attractive place for Real Estate Self-Directed IRA investing. Land is scarce and in high demand – and the demand is increasing as Hawaii’s population continues to grow. This creates a natural support for real estate prices. Even as the nationwide market cools off, Hawaiian luxury real estate properties continued impressive double-digit gains in 2017: 33 percent on Maui, 25 percent for Kauai and 24.8 percent for the ‘big island’ of Hawaii.
But there are some very important factors specific to Hawaii that any Real Estate Self-Directed IRA investor should understand before getting involved.
Leasehold vs. ‘fee-simple’ land
Land and politics in Hawaii are closely intermixed. When the Hawaiian monarchy was overthrown in 1898, hundreds of thousands of acres of developable land belonging to the Hawaiian Royal Family were eventually transferred to the Bishop estate and are managed for the benefit of the Hawaiian people.
Many homes in Hawaii are on Bishop Estate land, and Real Estate Self-Directed IRA homeowners do not retain permanent title to the land, but instead enter long-term leases, or take over leases from existing homeowners. Leases are typically decades long, though lease rents are usually reevaluated periodically – every 10 to 15 years. Eventually the lease expires, and the land undergoes ‘reversion’ back to the control of the landlord – at which time the lease is renegotiated, or the landlord decides to go with another tenant.
The term ‘fee simple,’ on the other hand, indicates that ownership of the land is permanent – the Real Estate Self-Directed IRA investor is purchasing the land outright, along with the house.
Real Estate Self-Directed IRA investors should be keenly aware of whether the property they are buying is leasehold or fee simple land.
If you see a listing for ‘fee available’ property, this indicates that the landlord is willing to sell the land outright – at the right price.
Fee simple land is typically more expensive than an equivalent plot of leasehold ground. The remaining number of years on the lease may also be an important factor in obtaining financing or finding a buyer. Financing is nearly impossible to obtain as the remaining lease term gets under 10 years, so the Real Estate Self-Directed IRA buyer may have to find a cash buyer.
Hawaii also has a state income tax, so if you become a Hawaii resident, or you are generating rental income from a property in Hawaii, be prepared to take an income tax haircut of up to 8.25 percent on income over $48,000 per year (single filers) or $96,000 (for married couples filing jointly.)
Property taxes can also be significant – $4.50 per $1,000 of appraised value in Honolulu up to $ million in value, and $9.00 per $1,000 of appraised value in excess of $1 million. So, property taxes on residential real estate are more significant for higher-priced homes. And with median home prices on the island of Oahu now nearing $800,000, it is very easy to find yourself with a home value of more than $1 million, and an increased tax liability, which you will need to pay from within your Real Estate Self-Directed IRA until you are at least age 59½ years old
Real Estate Self-Directed IRA investors should be very aware that they will need to adjust for property taxes and state income tax on income from Real Estate Self-Directed IRA investment properties.