First time STR in Hawaii to offset capital gains?

Question

Hello Bigger Pockets, I'm a newbie. I just sold my business and in looking for ways to offset capital gains taxes stumbled across a strategy in which a STR can write off all depreciation in year one via a cost segregation analysis, thereby reducing taxable income greatly for a specific year. Owning a vacation property in Hawaii has been a lifelong dream of mine, and it seems that this dream may also be able to generate some tax savings for me.

I'm looking for a 2 bedroom or more condo in a resort-zoned area of Hawaii, specifically the Waikoloa Beach or Mauna Lani Resort areas which are already resort-zoned.  I know that Hawaii is trying to reign in STRs so I don't want to stray outside of a resort-zoned area, however this means that costs are inflated.  There are very few condo units selling sub $1M, and I really don't want to spend much more than that.

Hawaii is a year-round rental area, so shooting for 80-90% occupancy seems do-able. I don't really expect the property to cash flow, I realize that it's an expensive place to operate a STR and that on-island management is necessary by Hawaii law, but I'd like to be able to cover most of my mortgage and expenses after putting 30-40% down.

Does anyone have experience in this market, or with this cost-segregation to write off income technique? Hawaii law requires an on-island manager, but in order to qualify as an active business I’ll need 100 hours managing the property so hiring a regional manager may hurt my tax write off plans. Any thoughts on how to abide by Hawaii rules AND  utilize this to offset capital gains?

Sean Ross · Answer

@Yonah Weiss is an expert in cost segregation.  Maybe you should check in with him @Christopher Jordan.

Carson McGee · Answer

Thanks for the connect! Christopher, I just sent you a message. Happy to set up a call and share our experiences.

Julio Gonzalez · Answer

Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions!

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

Jonathan Steen · Answer

Aloha Christopher, I live in Waikoloa Village, which is just up the hill from Waikoloa Beach Resort and Mauna Lani. Both are great locations for STR’s and as you know are zoned vacation so no legal issues. I looked into a condo in that area a few years ago and there wasn’t much, if any, cash flow after all the HOA, management and other fees. If you were to purchase something I may be interested in being the “local contact” and possibly helping out in other ways if you were to self manage. Feel free to reach out if I can help in any way. I’ve lived in Waikoloa Village for 7 years now and work for a contractor on the island so have made quite a few connections.

Brooklyn McCarty · Answer

Yonah Weiss is who you want for cost seg. He's great. As far as buying your first place in Hawaii, while it can be done I think I would start mainland. There are so many vacation markets here that may be easier for you to get started in and also have good cash flow.

Bryan Vukelich · Answer

Aloha @Christopher Jordan  - congrats on selling your business.  And just an fyi -  you are not required to have on-island management.  If you own investment real estate in Hawaii but do not live here and want to self manage, you are "supposed" to have a "point of contact."   I have quite a few clients who self manage their vacation rentals from the mainland.

Here is info directly off state of Hawaii website pertaining to vacation rentals (bold in mine):

If you’re off-island, you’ll need to designate a local contact who resides on the same island as the transient accommodation. The local contact may be an individual or an entity with a principal place of business on the same island as the property. Because they are on the same island as the transient accommodation, the local contact may be able to assist with issues which may arise relevant to the transient accommodation. The on-island local contact doesn’t have to be a licensed real estate professional, unless he/she is also involved in real estate activities, like renting or offering to rent the property.

And I've had at least one client do cost seg - if you'd like a couple referrals, you're welcome to contact me directly.

Lastly, have you considered O'ahu for a vacation rental?  I have a couple clients that own 2 BR units at Waikiki Sunset - one of them recently told me he is grossing close to $15k next month.  The other client has told me he consistently does $10-$14k/mo.  Units have recently been selling in $900-$950k range.

Duc Ong · Answer

@Christopher Jordan

I'm not a CPA, but I believe you would need to self-manage in order to qualify for the "STR loophole." This is because you need to show material participation. Let me know if you want to connect and chat more about it and other ways to create losses to offset your gains.

Jason Eisert · Answer

As far as supply and demand, once many of the rentals shut down (if the county actually enforces the bill) then yes there would be more demand for all STRs. That being said, the resort areas are already permitted for rentals. Thus, this new bill is only going to introduce additional hoops to jump through AND it creates a way for neighbors to take away your permit.

For example, if your renters are making noise that any neighbor considers to be a "disturbance" (literally that's the word they use in the bill), the police will be called and if there are 3 verified disturbances, you will loose your ability to rent the STR for 2 years.

This is a bit of an extreme example.. but it is one of many that could take away your ability to rent.

Christopher Jordan · Answer

Thanks for that info @Jason Eisert  From my cursory reading of the summary it seems that TARs in resort-zoned areas will still be allowed. Everywhere else will be limited for investors but still available for a resident wanting to rent out part of their home or an Ohana unit.

For investors in resort-owned areas this would seem to be a beneficial thing as it will limit STRs to those areas only, likely driving up prices. What are your thoughts?

Jason Eisert · Answer

@Christopher Jordan I live in Kona on the Big Island. I'm heavily involved in the new bills being written to impose additional regulations on the islands STR's (now TAR's). Would love to connect and chat. Happy to answer any of your questions. To help you begin though, the most recent drafts of the bills can be found here: https://www.hawaiicountytar.com/

The Leeward Planning Commission will hear the proposed bills on Thursday, April 18 @ 2 PM (streamed over youtube on Hawaii Planning Department's site). Following the hearing, the Windward and Leeward PC's will make recommendations and it will go back to council for amendments and readings. Still have months before it will be turned into law.

@Carson McGee lets connect as well. Always love to meet like-minded people in the same area!

First time STR in Hawaii to offset capital gains?

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