HRS § 235-5.5 — Individual housing accounts


§235-5.5 Individual housing accounts.
(a) There shall be allowed as a deduction from gross income the amount, not to
exceed $5,000, paid in cash during the taxable year by an individual taxpayer
to an individual housing account established for the individual's benefit to
provide funding for the purchase of the individual's first principal
residence. A deduction not to exceed $10,000 shall be allowed for a married
couple filing a joint return. No deduction shall be allowed on any amounts
distributed less than three hundred sixty-five days from the date on which a
contribution is made to the account. Any deduction claimed for a previous
taxable year for amounts distributed less than three hundred sixty-five days
from the date on which a contribution was made shall be disallowed and the amount
deducted shall be included in the previous taxable year's gross income and the
tax reassessed. The interest paid or accrued within the taxable year on the
account shall not be included in the individual's gross income. For purposes
of this section, the term "first principal residence" means a
residential property purchased with the payment or distribution from the
individual housing account which shall be owned and occupied as the only home
by an individual who did not have any interest in, individually, or whose
spouse did not have any interest in, if the individual is married, a
residential property within the last five years of opening the individual
housing account.
In the case of a married couple filing separate
returns, the sum of the deductions allowable to each of them for the taxable
year shall not exceed $5,000, or $10,000 for a joint return, for amounts paid
in cash, excluding interest paid or accrued thereon.
The amounts paid in cash allowable as a
deduction under this section to an individual for all taxable years shall not
exceed $25,000, excluding interest paid or accrued. In the case of married
individuals having separate individual housing accounts, the sum of the
separate accounts and the deduction under this section shall not exceed
$25,000, excluding interest paid or accrued thereon.
(b) For purposes of this section, the term
"individual housing account" means a trust created or organized in
Hawaii for the exclusive benefit of an individual, or, in the case of a married
individual, for the exclusive benefit of the individual and spouse jointly, but
only if the written governing instrument creating the trust meets the following
requirements:
(1) Contributions shall not be accepted for the
taxable year in excess of $5,000 (or $10,000 in the case of a joint return) or
in excess of $25,000 for all taxable years, exclusive of interest paid or
accrued;
(2) The trustee is a bank, a savings and loan
association, a credit union, or a depository financial services loan company,
chartered, licensed, or supervised under federal or state law, whose accounts
are insured by the Federal Deposit Insurance Corporation, the National Credit
Union Administration, or any agency of this State or any federal agency
established for the purpose of insuring accounts in these financial
institutions. The financial institution must actively make residential real
estate mortgage loans in Hawaii;
(3) The assets of the trust shall be invested only in
fully insured savings or time deposits. Funds held in the trust may be
commingled for purposes of investment, but individual records shall be
maintained by the trustee for each individual housing account holder that show
all transactions in detail;
(4) The entire interest of an individual or married
couple for whose benefit the trust is maintained shall be distributed to the
individual or couple not later than one hundred twenty months after the date on
which the first contribution is made to the trust;
(5) Except as provided in subsection (g), the trustee
shall not distribute the funds in the account unless the trustee:
(A) Verifies that the money is to be used for
the purchase of a first principal residence located in Hawaii, and provides
that the instrument of payment is payable to the mortgagor, construction
contractor, or other vendor of the property purchased; or
(B) Withholds an amount equal to ten per cent
of the amount withdrawn from the account and remits this amount to the director
within ten days after the date of the withdrawal. The amount withheld shall be
applied to the liability of the taxpayer under subsections (c) and (e); and
(6) If any amounts are distributed before the
expiration of three hundred sixty-five days from the date on which a
contribution is made to the account, the trustee shall so notify in writing the
taxpayer and the director. If the trustee makes the verification required in
paragraph (5)(A), then the department shall disallow the deduction under
subsection (a) and subsections (c), (e), and (f) shall not apply to that
amount. If the trustee withholds an amount under paragraph (5)(B), then the
department shall disallow the deduction under subsection (a) and subsection (e)
shall apply, but subsection (c) shall not apply.
(c) Any contributions paid or distributed out
of an individual housing account shall be included in gross income by the
individual for whose benefit the account was established for the taxable year
in which the payment or distribution is received, unless the amount is used
exclusively in connection with the purchase of the first principal residence in
Hawaii for the individual for whose benefit the account was established.
(d) The transfer of an individual's interest
in an individual housing account to a spouse under a dissolution of marriage
decree or under a written instrument incident to a dissolution of marriage
shall not be considered a taxable transfer made by the individual, and the
interest, at the time of the transfer, shall be treated as part of an
individual housing account of the transferee, and not of the transferor. After
the transfer, the account shall be treated, for purposes of this section, as
maintained for the benefit of the transferee.
(e) If a distribution from an individual
housing account to an individual for whose benefit the account was established
is made and not used in connection with the purchase of the first principal
residence in Hawaii for the individual, the tax liability of the individual
under this chapter for the taxable year in which the distribution is received
shall be increased by an amount equal to ten per cent of the amount of the
distribution which is includable in the individual's gross income for the
taxable year.
If, during any taxable year, the individual
uses the account or any portion thereof as security for a loan, the portion so
used shall be treated as if it had been distributed to that individual.
(f) If the individual for whose benefit the
individual housing account was established purchases a residential property in
Hawaii with the distribution from the individual housing account:
(1) Before January 1, 1990, and if the individual
sells in any manner or method or by use of any instrument conveying or
transferring the residential property, the gross income of the individual under
this chapter for the taxable year in which the residential property is sold,
conveyed, or transferred, whichever is applicable, shall include an amount
equal to the amount of the distribution from the individual housing account,
and in addition, the gross income of the individual shall be increased by an
amount equal to ten per cent of the total distribution from the individual
housing account; or
(2) After December 31, 1989, the individual shall
report one-tenth of the total distribution from the individual housing account
used to purchase the residential property as gross income in the taxable year
in which the distribution is completed and in each taxable year thereafter
until all of the distribution has been included in the individual's gross
income at the end of the tenth taxable year after the purchase of the
residential property. If the individual sells in any manner or method or by
use of any instrument conveying or transferring the residential property, the
gross income of the individual under this chapter for the taxable year in which
the residential property is sold, conveyed, or transferred, whichever is
applicable, shall include an amount equal to the amount of the distribution
from the individual housing account not previously reported as gross income,
and in addition, the tax liability of the individual shall be increased by an
amount equal to ten per cent of the total distribution from the individual
housing account. If the individual sells the residential property in any
manner as provided in this paragraph after all of the distribution has been
included in the individual's gross income at the end of the tenth taxable year
after the purchase of the residential property, the tax liability of the
individual shall not be increased by an amount equal to ten per cent of the
total distribution from the individual housing account.
An individual who purchased a residential property
in Hawaii with the distribution from an individual housing account before
January 1, 1990, who is subject to paragraph (1) may elect to report as
provided in paragraph (2). The election shall be made before January 1, 1991.
If the individual makes the election, the individual shall report one-tenth of
the total distribution from the individual housing account as gross income in
the taxable year in which the election occurs and in each taxable year thereafter
until all of the distribution has been included in gross income as provided by
paragraph (2). If the individual making the election sells the residential
property in any manner as provided in paragraph (2), then the individual shall
include as income the amount of the distribution not previously reported as
income and increase the individual's tax liability as provided in the second
sentence of paragraph (2), except when the third sentence of paragraph (2)
applies.
In the alternative, any individual subject to
paragraph (2) who established the individual housing account before January 1,
1990, may elect within one year after the date of purchase, to be subject to
paragraph (1).
(g) No tax liability shall be imposed under
this section if:
(1) The payment or distribution is attributable to
the individual dying or becoming totally disabled; or
(2) Residential property subject to subsection (f) is
transferred by will or by operation of law or sold due to the death or total
disability of an individual or individual's spouse,
subject to the following:
An individual shall not be considered to be
totally disabled unless proof is furnished of the total disability in the form
and manner as the director may require.
Upon the death of an individual for whose
benefit an individual housing account has been established, the funds in the
account shall be payable to the estate of the individual; provided that if the
account was held jointly by the decedent and a spouse of the decedent, the
account shall terminate and be paid to the surviving spouse; or, if the
surviving spouse so elects, the spouse may continue the account as an
individual housing account. Upon the total disability of an individual for
whose benefit an individual housing account has been established, the
individual or the individual's authorized representative may elect to continue
the account or terminate the account and be paid the assets; provided that if
the account was held jointly by a totally disabled person and a spouse of that
person, then the spouse or an authorized representative may elect to continue
the account or terminate the account and be paid the assets.
(h) If the individual for whose benefit the
individual housing account was established subsequently marries a person who
has or has had any interest in residential property, the individual's housing
account shall be terminated, the funds therein shall be distributed to the
individual, and the amount of the funds shall be includable in the individual's
gross income for the taxable year in which such marriage took place; provided
that the tax liability defined under subsection (f) shall not be imposed.
(i) The trustee of an individual housing
account shall make reports regarding the account to the director and to the
individual for whom the account is maintained with respect to contributions,
distributions, and other matters as the director may require under rules. The
reports shall be filed at a time and in a manner as may be required by rules
adopted under chapter 91. A person who fails to file a required report shall
be subject to a penalty of $10 to be paid to the director for each instance of failure
to file.