• Brad Konishi, CPA

Reporting Requirements for Military Servicemembers Operating a Rental in Hawaii


One of the fairly unique aspects of being a military servicemember is that they are allowed to pay income tax on their military income to their "state of legal residency" regardless of where they are stationed. So if a military servicemember is stationed in Hawaii, but declares California as their state of legal residency, their military income will have state income tax withheld for California, not Hawaii. Even better, if they declare Texas or Florida (neither state requires the payment of individual income tax) as their state of legal residency, they will usually not have any withholdings for state income tax!


However, that situation changes if the servicemember operates a rental in Hawaii. If they do, they will be required to file and pay a number of Hawaii taxes, including income tax and general excise tax - possibly even transient accommodations tax if they operated a short-term or vacation rental. This can be particularly problematic for some military home sellers, who sometimes don't even learn about this requirement until they've been operating their rental for years.


A State of Hawaii Dept. of Tax publication explains how the Military Spouses Residency Relief Act Tax Information Release 2010-01 covers this (source: https://files.hawaii.gov/tax/legal/tir/tir10-01.pdf) :


Nonresident Servicemember. A nonresident servicemember stationed in Hawaii in compliance with military or naval orders is not a Hawaii resident and will be treated as a nonresident for Hawaii income tax purposes unless the servicemember establishes residence or domicile in Hawaii. A nonresident servicemember is subject to Hawaii income tax on his or her Hawaii-sourced income such as Hawaii rental income and non-military source wages, salaries, tips, and commissions. The nonresident servicemember’s military or naval service income is not Hawaii-sourced income; therefore, it is not subject to Hawaii income tax.


In addition, some of my clients have told me that their tax preparers have told them that they aren't responsible for filing a Hawaii tax return if their rental property generates a loss. This isn't true, and the instructions for the Hawaii Income Tax Form N-15 (source: https://files.hawaii.gov/tax/forms/2019/n15ins.pdf) says the following:


Every individual doing business in Hawaii during the taxable year must file a return, whether or not the individual derives any taxable income from that business. ...For example, every person receiving rents from property owned in Hawaii is “doing business” and must file a return whether or not the person’s expenses exceed the gross rental income.


Whenever the Department of Tax receives a HARPTA filing, one of the first things the reviewer does is to check to see if the home seller is current with all tax filings and payments, so it's important that home sellers filing for a HARPTA waiver, reduction, or early refund be current with all of their tax obligations. If you had a tax preparer preparing your tax returns but they neglected to complete a Hawaii tax return when they should have, please ask them to assist you in getting caught up. They've presumably already filed your Federal return, so it shouldn't be too difficult for them to get you caught up with your Hawaii Income Tax obligations. Best of luck!

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