Policy & Regulation

Hawaii REITs Face Potential 4.4% Tax Hike, Impacting Commercial Property Valuations

·7 min read·👀 Watch

Executive Summary

Legislative proposals aim to close a loophole allowing Real Estate Investment Trusts (REITs) to avoid Hawaii's corporate income tax, potentially increasing operating costs for owners of significant commercial properties. Investors and tourism operators should monitor legislative progress for potential impacts on property valuations and rental income.

  • Real Estate Owners: Potential for increased operating expenses due to a new 4.4% corporate tax liability.
  • Investors: REIT valuations may be adjusted downward; consider impact on portfolio returns.
  • Tourism Operators: Increased commercial lease costs could indirectly affect hotel and hospitality business overhead.
  • Action: Watch proposed legislation. If enacted, review property ownership structures and lease agreements.
👀

Watch & Prepare

Medium Priority

If this loophole is closed, entities could face new tax liabilities, affecting profitability and investment strategies.

Monitor legislative sessions in Hawaii for Bill 123 or similar proposals seeking to amend corporate tax laws regarding REITs. If enacted, impacted real estate owners and investors should consult with tax advisors to understand the specific tax implications for their REIT holdings and consider restructuring or adjusting property valuations accordingly. Review existing commercial lease agreements to assess pass-through clauses for newly imposed taxes.

Who's Affected
Real Estate OwnersInvestorsTourism Operators
Ripple Effects
  • →Closing REIT loophole → increased operating costs for REITs → potential increase in commercial lease rates → higher overhead for tourism operators and small businesses
  • →Increased tax revenue for Hawaii → funding for public services → potential economic stimulus or improved infrastructure
  • →REITs facing higher taxes → reduced profitability → potentially lower property acquisition/development activity → impact on overall real estate market supply and demand
A stunning view of the Kalalau Valley with mountains and ocean in Kauai, Hawaii.
Photo by Roberto Nickson

Hawaii REITs Face Potential 4.4% Tax Hike, Impacting Commercial Property Valuations

Hawaii's commercial real estate sector is at a potential inflection point as legislative efforts gain traction to close a long-standing tax loophole utilized by Real Estate Investment Trusts (REITs). Currently, REITs, despite owning vast swathes of profitable commercial property across the islands, are exempt from Hawaii's state corporate income tax, a burden shouldered by most other for-profit corporations.

This proposed change, if enacted, could introduce a new 4.4% state corporate income tax liability for these entities. The closure of this loophole, termed

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