Property Tax Lag – Why?

Most people are aware that the counties either charge different rates or offer credits if you live in your home versus owning it as an investment. What surprises almost everyone is how long it takes for the county to implement those changes when you purchase a home.

In most other states, when you purchase a home, the property taxes you pay are immediately updated at the time of sale. Hawaii has not moved into the 21st century yet, and depending on when you purchase, you may be paying a higher rate for a very long time.

Hawaii has a disproportional amount of property that is owned by those that don’t live here. Each one of those properties pays a higher amount of property taxes. If you are buying a property as an owner-occupant, but the seller held the property as an investment property, you’ll be surprised to learn that you will pay the higher rate for a very long time before it gets updated.

This higher tax rate could impact a buyer’s ability to finance a specific property. Lenders will not calculate your future property tax rate when underwriting your loan application. As with all aspects of lending, underwriting is a snapshot in time. What everything is today, is how the underwriter will look at things.

Hawaii’s bizarre system of collecting property taxes twice a year is made even more confusing as to the incredibly ridiculous deadline they set to have changes made to the rate you pay. The fiscal year for each county begins on July 1st of each year. Property taxes are split up into two payments (January-June and July-December). Because of when the fiscal year starts, your 1st property tax installment is for the JUL-DEC period. The counties calculate the taxes per fiscal year. So if you want to make changes, you have to do it long before the end of the previous fiscal period. For example: For the county of Honolulu, if you want to get your property taxes adjusted, you must file your paperwork no later than September 30 of the previous year. In other words, if you want the new tax rate to take effect in July of 2018, you must have filed the paperwork by September 30th of 2017.

Here’s just how horrible this deadline is, and how long it will impact you: If you bought your new owner-occupied home in October 2017, you are past the September 30th deadline to adjust your taxes. In 2018 your designation will not change. In fact, your new tax rate will not be realized until July of 2019! Hawaii, Maui, and Kauai counties are not very much better.

This 3rd world banana republic way of soaking it to the residents of Hawaii will not get changed any time soon. It brings in too much money for each of the counties. Today’s topic is meant as an eye opener to prospective home buyers. When reviewing properties to place an offer on, find out what the current tax rate for that property is. An easy preliminary guess as to the tax rate is as simple as seeing if the home is currently occupied by the owners. If it is not, the property taxes may be based on an investment property. Calculating the extra cost of the higher property taxes for a period of time could influence your offer price on that property.

As always, I’m here to shed light aspects of real estate and mortgage financing you may have never considered.