One issue that has irritated lawmakers for the past few years is the ability to transfer ownership of companies or organizations with substantial real estate holdings without paying the conveyance tax on the properties’ transfer.
One issue that has irritated lawmakers for the past few years is the ability to transfer ownership of companies or organizations with substantial real estate holdings without paying the conveyance tax on the properties’ transfer.
For the last couple of years, lawmakers have introduced measures to ensure these “complex transactions” are taxed, though they are not currently taxable under the conveyance tax as the real property is owned by a legal entity. While the intent of lawmakers is to close this loophole, it is important to remember that the conveyance tax was not originally intended to be a source of revenue.
Only in recent years, with lawmakers seeking to fund their favorite programs, did the conveyance tax come under fire as a way to raise new sources of revenue. With rates as high as $1.25 per $100 of value transferred, lawmakers now believe transfers of real property, albeit as part of the acquisition of a company or partnership, are intentional evasions of the tax. Understandably, there was a lot of resistance when the bill was introduced.
The legislation under consideration would impose the lowest rate available under the conveyance tax as a way to blunt the opposition. It is not hard for the skeptical folks to believe that while the measure proposes the conveyance tax be imposed at the lowest rate initially, given their track record, 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 an investor must weigh in deciding whether or not the return on an investment in Hawaii is attractive or reasonable.
For the sake of younger readers, 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 the time administered the real property tax – in establishing real property assessed values.
At that time, the department stated the conveyance tax, imposed each time property changes title or ownership, was not intended to be a revenue-raising device. Since then, 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 to current owner, the Howard Hughes Corporation. 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. On every million dollars of value, the conveyance tax amounts to $12,500, on one hundred million dollars of value, 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.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.