(a) Allowance
deduction.
(1) An individual taxpayer, also
referred to as a participant, including a married individual, shall be allowed
a deduction from gross income the amount paid in cash during the taxable year
to an individual housing account. Except as otherwise provided, any interest
paid or accrued on the account shall not be included in gross income.
(2) The deduction shall not exceed $5,000 for
each taxable year. The aggregate amount allowable shall not exceed $25,000.
These amounts shall be exclusive of any interest paid or accrued.
(b) Special rules for married
individuals; separate accounts. Each married individual shall be allowed to
maintain a separate individual housing account.
Where separate accounts are maintained, each married
individual shall be allowed to deduct from gross income the amount paid into
the account in cash but not to exceed $5,000 for each taxable year. The amount
of interest paid or accrued shall be excluded and disregarded in the
determination of the $5,000.
In determining the maximum aggregate amount allowable, the
accounts of each married individual shall be combined and the total aggregate
amount shall not exceed $25,000.
(c) Special rules for married individuals;
joint accounts. Where a married individual maintains a joint account with the
individual's spouse, it shall be deemed to be a single individual housing
account. There shall be allowed as deduction from gross income only that amount
paid into the joint account but not to exceed $5,000 for each taxable year, or
an aggregate of $25,000 for all taxable years. The limitation shall apply
whether or not each of the spouses files separate income tax returns.
Where married individuals file separate returns, unless
otherwise shown, the presumption is that both spouses contributed to the
account and each spouse will be allowed to deduct one-half of the amount paid
into the account. Where, by satisfactory proof of deposit, either spouse shall
satisfy the director of taxation that the payments made into the account were
derived from income earned solely by the spouse, the individual shall be
allowed to deduct the amount of such payments from the individual's gross
income.
(d) Time for
payment. Payment to the individual housing account shall be made no later than
December 31 of the tax year for which the amounts are claimed as a deduction.
Where the taxable year is other than a calendar year the payment shall be made
no later than the last day of such year for which the amounts are to be claimed
as a deduction.
(e) Eligibility. To
be eligible for the deduction, neither the individual nor the individual's
spouse shall have had any prior interest in residential property either within
or without the State and the individual, during the period such account is
maintained, shall not acquire any interest in any residential property
regardless where located.
The term "interest in residential property" shall mean any
legal interest as joint tenants, tenants by the entirety, or tenants in common
or tenancy be severalty whether by way of a leasehold or fee simple estate in
all or part of a house, townhouse, condominium or cooperative apartment, or any
other property used as a principal residence.
(f) Requirements for an individual housing
account.
(1) Exclusive benefit. An individual
housing account shall be created as a trust account established in the State of
Hawaii for the exclusive benefit of an individual, whether or not the
individual is married.
The principal purpose of the trust is to create a special
savings fund to provide an adequate incentive for the people of this State to
become owners of their own home.
(2) First principal residence. An individual
housing account shall be allowed only for the purchase of a first principal
residence in this State. No account shall be established for any individual who
either currently owns or formerly owned a principal residence, or had any
interest in residential property whether or not the principal residence or
residential property is located within or without the State. For married
individuals, the limitation applies equally to either spouse.
The term "principal residence" shall mean the dwelling unit
where the individual actually lives in and intends to be the individual's fixed
abode. The individual shall physically reside in the dwelling unit with an
intention to make that dwelling unit the individual's home. There shall be a
presumption that the dwelling unit in which an individual lives is that
individual's principal residence. If a portion of a building is used for some
purpose other than as a dwelling unit, for example, a portion of a building is
used for a trade or business, only the portion used as a dwelling unit shall be
considered a residence.
(g) Qualifying institutions and disclosure
requirements. Qualifying institutions. Only individual housing accounts
maintained with a bank, savings and loan association or credit union meeting
the following requirements may qualify for the deduction and exemptions:
(1) Actively making residential real estate
mortgage loans in Hawaii.
(A) The fact that
no mortgage money is available or that no loans have been made because of high
interest rates shall not, alone, disqualify a lending institution from becoming
a qualified institution.
(B) The
fact that the lending institution has made no loans during a period when other
financial institutions have been making loans for the purchase of real property
in the State shall raise a presumption that the institution is not actively
making residential real estate loans in this State.
(C) Where a lending institution, when the
account has been first opened, was actively making residential real estate
mortgage loans but has since ceased to actively make such loans, it may:
(i) continue to maintain an existing
account;
(ii) not open new
accounts;
(iii) not attempt
transfer of housing accounts.
(2) Be ready and willing to make residential
real estate mortgage loans in Hawaii regularly throughout the year.
(h) Statement of individual
housing account. Each individual who claims the deduction for an individual
housing account shall attach to the individual's income tax return, a
disclosure statement on the form prescribed by the director of taxation, to be
completed by the lending institution. A copy of the form is attached hereto as
Exhibit I, entitled "Statement of Individual Housing Account," August 1, 1983,
located at the end of this section.
Requirements of disclosure statement to individual. Each
lending institution shall furnish the individual a disclosure statement
whenever an individual housing account is established on a form prescribed by
the director of taxation. A copy of the form is attached hereto as Exhibit II,
entitled "Disclosure Statement for Individual Housing Accounts," August 1,
1983, located at the end of this section. The statement shall explain in
nontechnical language the income tax consequences of establishing an individual
housing account and the limitations and restrictions of the account.
(i) Termination of account. The
individual housing account shall terminate in the following circumstances:
(1) The account shall terminate whenever all
or part of the account is used for the purchase of a first principal residence
which is located in Hawaii. No deduction shall be allowed for deposits made
after the termination.
(2) Upon
earlier withdrawal of funds from the account other than for the purchase of a
first principal residence.
(3) Upon
the expiration of 120 months from the date of the first deposit to the account.
In case of a housing account into which funds from another account have been
transferred, the account shall terminate upon the expiration of 120 months from
the date of the first deposit to the account which was first opened in time.
All amounts in the account on the termination date shall be
distributed to the participant subject to the requirements relating to married
individuals with a joint account. Except where the amounts have been used to
purchase a principal residence, any amounts remaining in the account on the
termination date shall be treated as a distribution and shall be included in
gross income in the taxable year in which the termination date falls and shall
be subject to the additional tax for failure to use for a first principal
residence.
(j)
Excess contributions. Where two individuals who have separate individual
housing accounts become married to each other and thereafter convert their
separate account into a single joint account, and the sum of their individual
accounts exceeds the allowable amounts for a joint account, the excess
resulting from the conversion shall not be deemed in violation of this section.
No additional deposits may be paid into the account for each year there exists
an excess of contributions. The excess shall be credited to the account in the
next immediately succeeding year as though a deposit had been made but the
amount of the credit shall not exceed $5,000 for that year. Should there still
exist an excess contribution in the account, the excess shall then be credited
to the next succeeding and subsequent year. In the event the excess
contributions exceed the total aggregate amount of $25,000, any and all amounts
in excess of $25,000, exclusive of interest and additions, shall be withdrawn
by the participant with no penalty assessed. Such withdrawal shall be made in
the taxable year in which the excess contributions was made.
(k) Duties of trustee. In general. The
trustee shall accept only cash deposits. The deposit of stocks, bonds,
debentures, mutual funds, real estate, or otherwise, shall not be accepted into
the account.
(1) The trustee shall not accept
deposits in excess of $5,000 for a single taxable year or in excess of $25,000
in the aggregate for all taxable years.
(2) The trustee shall not establish a housing
account for an individual unless the trustee receives a written statement from
the individual indicating that the individual and, if married, the individual's
spouse, does not currently own and has never owned a principal residence, and
had no interest in residential property whether in Hawaii or in any other state
or country.
(3) The trustee shall
distribute the entire amount in an account within 120 months after the first
deposit to the account. The transfer of any amounts in a housing account to an
account which is not a housing account, shall be deemed to constitute a
distribution of the account. All such transfers shall be treated as withdrawals
not used for the purchase of a first principal residence, as provided in this
section, and the trustee shall withhold the required tax.
(4) For each withdrawal other than for death
or disability, the trustee shall withhold the prescribed taxes, unless it
verifies in accordance with this section that all or a part of the withdrawal
is being used for the purchase of a first principal residence that is located
in Hawaii and makes the instrument of payment payable to the seller or the
seller's designee (other than the participant), construction contractor or
other vendor of the property.
(5)
The trustee shall furnish the written disclosure statement required by section
18-235-5.5(c), Administrative Rules, and a copy of the governing instrument as
well as any amendments made subsequent thereto, to each person who establishes
a housing account.
(6) The trustee
may invest assets of the trust only in fully insured savings or time deposits.
Certificates of deposit shall qualify as savings or time deposits. Assets of a
housing account trust shall not be invested in any other types of assets, e.g.,
stocks, bonds, notes, debentures, mutual funds or otherwise.
(7) The trustee may commingle funds held in
housing account trusts for purposes of investment but the trustee shall
maintain individual records on each account in accordance with this
rule.
(l) Report and
verification by trustee of withdrawals used for the first principal residence
in Hawaii. Before allowing a withdrawal from a housing account, the trustee
shall either withhold the tax prescribed by subsection (m) below, or verify
that the withdrawal is being used for the purchase of a first principal
residence that is located in Hawaii. The verification shall be supplied on a
form prescribed by the director of taxation which is to be completed by the
participant and furnished to the trustee. The prescribed form is attached
hereto as Exhibit III, entitled "Request for Withdrawal to Purchase First
Principal Residence," August 1, 1983, located at the end of this section.
The trustee shall file a copy of this form with the director
of taxation at the time that the trustee files the annual information return
for the particular account.
(m) Withholding requirements. The trustee
shall withhold an amount equal to ten percent of the amount of any withdrawal
and remit the amount within ten days to the director of taxation unless the
trustee satisfies one of the following requirements:
(1) Verifies in accordance with this rule
that the withdrawal is used for the first purchase of a principal residence
located in Hawaii, and makes the withdrawal payable to the person or entity
from whom the residence is being purchased, the person's designee, other than
the participant, construction contractor or other vendor of the property either
alone or jointly with the participant, or
(2) Verifies in accordance with this section
that the participant has died or is disabled; or
(3) Determines that the withdrawal is of an
excess contribution and is withdrawn by the due date of the tax return for the
taxable year in which the excess contribution was made.
The trustee shall be personally liable for the amount of any
tax required to be withheld under this section.
(n) Penalties. For each instance in which a
trustee fails to timely file or furnish a report or return required by this
section with either the director of taxation or with the individual
participant, a penalty of $10 shall be due from the trustee and shall be paid
to the director of taxation.
(o)
Tax treatment of housing account distributions, generally. Except as otherwise
provided in this section, any amount actually paid or distributed or deemed
paid or distributed from a housing account shall be included in the gross
income of the participant for the taxable year in which the payment or
distribution is received. In addition, the tax liability of the participant
shall be increased by an amount equal to ten percent of the amount of the
distribution which is includible in the participant's gross income for the
taxable year.
(p) Exemption from
tax for distributions used for a first principal residence.
(1) Amounts withdrawn from a housing account
that are used exclusively in connection with the first purchase of a principal
residence in Hawaii shall not be included in gross income in the taxable year
withdrawn.
(2) If the participant
is building a new residence or purchasing and remodeling an existing residence
(or having a contractor do it for the individual), all amounts incurred or to
be incurred in such construction or purchase shall not be included in gross
income.
In order to qualify as an amount "used exclusively in
connection with the first purchase of a principal residence," the amount
withdrawn shall be made payable to the person or entity from whom the property
is being purchased. This may include the seller, vendor, contractor, or
designee of one of them (other than the participant), or the materials or labor
being purchased. The amount may be made payable to such person or entity,
alone, or jointly with the participant.
(3) Use of an amount from a housing account
pursuant to a written earnest money agreement shall be considered as use for
the first purchase of a principal residence, if all other requirements are met.
If the sale is not completed and the money is either forfeited pursuant to the
earnest money agreement or immediately redeposited in the housing account, no
tax consequences shall result.
(4)
Only the participant may use the account for the purchase of the participant's
own first principal residence. It cannot be used to purchase a residence for
someone else, for example, by gift, loan, or rental to another.
(5) A participant shall not deduct or exclude
the same item twice, under different provisions of law. For example, when the
participant makes a withdrawal from a housing account and uses it for the first
purchase of a principal residence, if any portion of the withdrawal is used to
pay interest expense in connection with the purchase of the residence, no
deduction shall be allowed for the portion so used, since interest expense is
deductible under another provision of law.
(6) No adjustment to the basis of the
residence that is purchased is required because of the use of amounts from a
housing account.
(7) In order to
claim exemption from income tax of amounts used for a first principal residence
in Hawaii, the participant shall attach to participant's income tax return for
the taxable year a copy of the verification form that participant furnished the
trustee as well as a copy of the closing statement, if any, from the purchase
of the residence. The participant shall also furnish any additional information
that the director of taxation may request to verify that all requirements of
this section have been met.
(q) Distribution incident to divorce. The
transfer of a participant's interest, in whole or in part, in an individual
housing account to the participant's former spouse under a valid divorce decree
or a written instrument incident to the divorce shall not be considered to be a
distribution from the housing account. The interest transferred to the former
spouse shall be treated as a housing account of that spouse, subject to the
requirements of this section.
(r)
Distribution upon death. Upon the death of a participant, the funds in the
account shall be paid to the participant's estate and shall not be deemed to
constitute a taxable distribution for purpose of this section.
(1) If the account was held jointly by the
decendent and a spouse of the decendent, and the funds are paid to the
surviving spouse, the payment shall not be deemed to constitute a taxable
distribution.
(2) The surviving
spouse may elect to continue the housing account, subject to the requirements
of this section and the election shall not be deemed to constitute a taxable
distribution.
(s)
Distribution upon total disability. The withdrawal of funds from a housing
account by a participant who is totally disabled shall not be deemed to
constitute a taxable distribution.
The disability shall be certified to by the department of
health or by any state, or county medical officer as required by Section
235-1, HRS.
(t) Transfers of housing accounts.
(1) The term "transfer" shall mean a transfer
of the entire amount in a housing account in one financial institution or
credit union to a new housing account in another financial institution or
credit union.
(2) The transfer of a
housing account shall not be treated as a withdrawal from the first account as
long as the requirements of this rule are met with respect to the second
account. The amount transferred shall neither be included in gross income in
the year of the transfer nor subject to the ten percent tax for not being used
for the purchase of a first principal residence in Hawaii.
(3) A transfer shall qualify under this
section if the entire interest in the housing account is transferred to a new
housing account and the original account is closed and terminated. A
participant shall not have more than one account at any one time. The funds in
an account to be transferred shall be promptly transferred from one financial
institution or credit union to another. Any use of the funds for any purpose
other than the purchase of a first principal residence in the interim shall be
treated as a withdrawal not used for a first principal residence and shall be
included in gross income and made subject to the additional tax.
(4) The housing account into which the funds
have been transferred shall terminate 120 months from the date the earliest
account was established and the written trust agreement shall so provide. The
participant shall inform the new trustee that the deposit is a transfer of a
housing account, rather than a new account, and the date of the first deposit
to the original account.
(5) The
trustee of the account to be transferred shall not be subject to the
withholding requirements of this section if it received a written declaration
from the participant of the participant's intention to transfer the account.
The trustee shall make the instrument of payment payable to the new trustee,
either alone or jointly with the participant. The trustee within ten days shall
file a copy of the declaration with the director of taxation and shall note
thereon the date the funds have been transferred and shall identify the lending
institution to which the funds have been transferred.
(u) Tax treatment upon the subsequent sale or
conveyance of residential property which was purchased with a housing account
distribution.
(1) In General. Upon the sale or
conveyance of residential property which was purchased with a housing account,
an amount equal to the original distribution and an additional ten percent of
the distribution shall be included in the gross income of the
individual.
(2) Sale due to death
or total disability of the participant or the participant's spouse. There shall
be no tax liability where the residential property purchased by a housing
account has been sold due to the death or total disability of a participant or
the participant's spouse.
