Following the money government spends isn't easy in Hawaii, according to a new report - Photo: Emily Metcalf
Following the money government spends isn’t easy in Hawaii, according to a new report – Photo: Emily Metcalf

BY LOWELL L. KALAPA – One issue that has irritated lawmakers for the past few years is the ability to transfer ownership of companies or organizations that have substantial holdings of real estate without having to pay the conveyance tax on the transfer of the ownership of those real estate holdings.

For the last couple of years, lawmakers have introduced measures to subject these transactions that they have labeled as “complex transactions” involving the transfer of real property to ensure that the transactions are taxed even though they are not currently taxable under the conveyance tax as the real property is owned by a legal entity like a corporation or a partnership.

While the intent of lawmakers is to close this loophole which they believe is an attempt to evade taxation, one has to remember that the conveyance tax was never originally established to be a source of revenue.

It has been only in recent years as lawmakers sought to fund their favorite programs did the conveyance tax come under fire as a way to raise new sources of revenue to fund favored programs.

With rates as high as $1.25 per hundred dollars of value transferred, lawmakers now believe that transfers of real property, albeit as part of the acquisition of a company or partnership, are an intentional evasion of the tax.  As one can surely understand, there was a lot of resistance when the bill was introduced.

Thus, the legislation that has been under consideration would impose the lowest rate available under the conveyance tax as a way to blunt the opposition.

But for the skeptics among the observers, it is not hard to believe that while the measure proposes that the conveyance tax be imposed at the lowest rate initially, given their track record in the past, lawmakers would merely increase the rate once the legislation is adopted.  It would be just another way lawmakers could raise additional revenue in the future.

Unfortunately, the imposition of the conveyance tax on these transfers may add another nail in the economic coffin of Hawaii as it is just one more cost that an investor must weigh in deciding whether or not the return on an investment in Hawaii is attractive or reasonable.

For those readers who are a bit younger, it should be noted that the conveyance tax was initially enacted by the 1966 legislature after the repeal of the federal law requiring stamps for transfers of real property.  It was enacted for the sole purpose of providing the department of taxation with additional data for the determination of market value of properties transferred.  This information was also to assist the department – which at that time administered the real property tax – in establishing real property assessed values.

At that time the department stated that the conveyance tax was not intended to be a revenue-raising device.  The conveyance tax is imposed each time property changes title or ownership.  However, over the years the tax has been increased and conveyance tax revenues have been tapped to provide revenue for the land conservation fund, rental housing trust fund, and the natural area reserve fund.

So what kind of transaction is this and why have some taxpayers used this means to transfer real estate?  The first big transfer involved the sale of what used to be known as the Ward Estate which had been held by General Growth Properties when it was sold the current owner, Howard Hughes Corporation.  However, the more recent transaction involving the Lanai Company that was sold to the owner of the software company Oracle raised a few eyebrows.

And why did these transactions take place as the sale of a company or entity?  Well, when one considers that the value of the real estate owned by these companies or entities probably was worth hundreds of millions of dollars and the maximum tax rate is $1.25, we are talking some serious money.

For example, on every million dollars of value the conveyance tax amounts to $12,500 or on a $100,000 million dollar value of real estate, the tax is $1.25 million.  We are talking real money.

While advocates of the proposed legislation can only think of the millions of dollars of potential revenue, the losers are the real property assessors who now cannot get an idea of the value transferred as it would affect surrounding real property.  But the real losers are the real property taxpayers as the valuation data will be lost forever.

The bottom line is that the drive to “punish” speculators in Hawaii real estate by imposing such confiscatory conveyance tax rates has resulted in these clever transfers of entities that happen to own real property in Hawaii.

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