HAR § 18-235-4-08 — Source of income

(a) Income derived from real or tangible personal property is sourced at the place where the property is owned, namely the place where the property has its situs. If tangible personal property is owned and used in different locations, income from the property shall be allocated as provided in section 235-25, HRS. (b) Income from intangible property, such as interest and dividends, is sourced at the place of the owner’s domicile unless the property has acquired a business situs at another place, in which event the income is sourced at that place. Intangible property has a business situs in this State if it is employed as capital in this State or the possession and control of the property has been localized in this State. Example 1: A corporation owns stocks, bonds, and other intangible personal property. It pledges the property in Hawaii as security for the payment of indebtedness, taxes, and other expenses incurred in connection with a business in this State. The pledged property has a business situs in Hawaii. Example 2: A corporation maintains a branch office here and opens a bank account on which the agent in charge of the branch office may draw for the payment of expenses in connection with the activities in this State. The bank account has a business situs in Hawaii. Example 3: The corpus of a trust contains United States Treasury bills, bank certificates of deposit, and shares of preferred and common stock. The trustee of the trust, a Hawaii corporation, exclusively holds, controls, and administers the corpus of the trust. The trustee is permitted broad discretion to invest trust income and accumulations and is responsible for the collection and disbursement of any income generated by the trust assets. The property forming the corpus of the trust has a business situs in Hawaii. Thus, the trust’s income is Hawaii source income; however, the exclusion in section 235-4.5, HRS, may apply in some cases. (c) Income from an interest in real property, such as a leasehold, has its situs where the real property is located. The situs of the purchaser’s interest under a contract for the sale of real property is where the real property is located. (d) Income from a trade or business is sourced at the place where the trade or business is carried on. (e) Income from the performance of personal services has its source at the place where the services are performed. (f) A gain or loss on the sale or other disposition of property has its source at the place where the property was owned, that is, where it had its situs, at the time of the sale or other disposition. This rule applies whenever gain or loss is considered as resulting from the sale or other disposition of the underlying property, irrespective of where the contract for the sale or other disposition of the property was made. Thus, if property is disposed of on the installment method, the portion of any installment payment that represents gross profit is income that has its source at the place where the underlying property had its situs at the time of disposition. Example: Y is the vendor on an agreement of sale for real property on Kauai. In 1994, Y sells Y’s interest to S and realizes a gain of $5,000 under section 453B (with respect to gain or loss HRS §235-4 §18-235-5 on disposition of installment obligations), IRC. Under section 453B, IRC, the gain is considered to be from the sale or exchange of the property in respect of which the installment obligation was received. Thus, because the underlying property is located in Hawaii, the $5,000 is Hawaii source income.