HAR § 18-235-5.5 — Individual housing accounts (IHA)

(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 HRS §235-5 §18-235-5.5 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 §18-235-5.5 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 per cent 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) V erifies 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) V erifies 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 per cent of the amount of the distribution which is includible in the participant’s gross income for the taxable year.