Critics of the longstanding tax break say the state has no reason to subsidize second homes. The Hawaii Association of Realtors strongly disagrees.

Bills are moving in both the state House and Senate to wipe out the state tax deduction for mortgages on second homes, a change some lawmakers hope could help ease the upward pressure on Hawaii’s housing market.

The House Economic Development Committee approved House Bill 886 on Wednesday, with Chairman Daniel Holt explaining that “housing has been one of the biggest issues for us. If this can free up some homes, then it’s a worthy cause.”

That bill is a companion measure to Senate Bill 924, which was approved by the Senate Housing Committee on Tuesday.

Ewa West Loch aerial. Large parcels of land on the near the West Loch and Ewa areas. 2022
Some lawmakers contend the state’s tax deduction for mortgage interest should apply to first homes but not to second homes. Eliminating the tax break for second homes could save the state millions of dollars, according to the Tax Department. (Cory Lum/Civil Beat/2022)

The House bill would simply eliminate the state mortgage deduction for second homes, while preserving the deduction for first homes.

The Senate measure would do the same. However, Senate Housing Chairman Stanley Chang announced Tuesday he will amend the Senate draft to require the savings from eliminating the tax break for second homes be deposited into the Dwelling Unit Revolving Fund to support new housing development.

Staff from the state Tax Department estimated that eliminating the tax break would save the state $11.7 million in the fiscal year that begins July 1, and a total of $78.5 million over the next six years.

The Hawaii Association of Realtors strongly opposes both bills. The industry group contends the mortgage deduction on second homes provides “an important opportunity for individuals to use to invest for retirement or to support their families with Hawaii’s high cost of living and housing.”

More homeowners are purchasing second homes today for their elderly parents or for their adult children, who would otherwise be unable to afford a home, the group’s director of advocacy Lyndsey Garcia told both committees in written testimony.

But Senate Judiciary Committee Chairman Karl Rhoads, the author of both bills, said the state can provide “a significant amount of money” for additional housing production if it stops subsidizing second homes.

“People are struggling to find first homes to live in that they can afford, and we’re subsidizing people’s second homes, and it doesn’t make any sense to me,” he said.

State Rep. Lisa Marten, who introduced the measure in the House, said the interest deduction tax break ought to apply exclusively to first homes, not to second homes.

“If people can afford it, that is their right to have a second home, I’m not opposed to that,” she said. “I just don’t think we necessarily need to give tax breaks for it.”

Marten said the interest tax deduction is a tool “to promote first home ownership, so people can achieve that dream of owning a home — as opposed to giving away money to owners of second homes that then reduces our housing stock for first homeownership.”

“We have a big problem in my district with second homes being purchased as vacation rental investments, so I see in my neighborhood that is a very common use of what might otherwise might be residences for local people,” she added. Marten represents Kailua, Lanikai and Waimanalo.

The measures now advance to the Senate Ways and Means Committee and House Finance Committee for further consideration.

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