Year-End Tax Planning for Hawaii Rental Property Owners

If you own rental property on Oahu, November is the month to have a serious conversation with your tax advisor. The window between now and December 31 represents your last opportunity to make strategic moves that reduce your 2025 tax liability — and with major federal tax law changes taking effect this year, the stakes are higher than usual.

Hawaii rental property owners face one of the most complex tax environments in the country. You’re navigating federal income taxes, Hawaii state income taxes with rates reaching 11%, the General Excise Tax on rental income, and potentially the Transient Accommodations Tax if you operate short-term rentals. Each of these layers offers both obligations and opportunities, and the landlords who plan proactively consistently pay less than those who scramble at filing time.

At Agency Rentals, managing over 1,500 residential units across Oahu, we work closely with local tax professionals year-round to help our clients structure their rental operations for maximum tax efficiency. This guide covers the year-end moves every Hawaii rental property owner should be evaluating right now — and the 2026 changes you need to prepare for.

What Changed in 2025: The Federal Landscape

The most significant federal tax development of 2025 was the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. While much of the public discussion focused on other provisions, several elements directly impact rental property owners.

100% Bonus Depreciation Is Back

This is the headline item for real estate investors. The OBBBA restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This means that qualifying assets — including appliances, flooring, cabinetry, HVAC systems, fencing, and certain property improvements — can be fully deducted in the year they’re placed in service rather than depreciated over multiple years.

For Hawaii landlords who purchased new appliances, installed split AC systems, replaced flooring, or made other qualifying improvements in 2025, this means a potentially massive first-year deduction. A $5,000 mini-split installation that would normally be depreciated over its useful life can now be written off entirely in 2025.

Year-end action item: Review every capital expenditure you made on your rental property in 2025. Work with your CPA to determine which items qualify for 100% bonus depreciation versus standard 27.5-year depreciation. If you’ve been considering improvements, completing them before December 31 allows you to take the full deduction on your 2025 return.

SALT Deduction Cap Increased to $40,000

The OBBBA raised the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for tax year 2025. For Hawaii residents — who face among the highest combined state and local tax burdens in the nation — this is meaningful. The increased cap means more of your Hawaii state income taxes and property taxes can be deducted on your federal return if you itemize.

The $40,000 cap is set to increase by 1% annually through 2029, then revert to $10,000 in 2030. Plan accordingly.

Section 199A Deduction Made Permanent

The Qualified Business Income (QBI) deduction under Section 199A, which allows eligible landlords to deduct up to 20% of qualified business income from pass-through entities, has been made permanent under the OBBBA. If your rental activity qualifies (which requires meeting certain participation and income thresholds), this deduction remains one of the most powerful tax-reduction tools available to real estate investors.

Interest Deduction Limitation Reverted to EBITDA

The OBBBA reverted the Section 163(j) business interest limitation to an EBITDA-based approach, allowing depreciation and amortization to be added back when calculating the interest deduction cap. For highly leveraged rental property owners, this can significantly increase the amount of mortgage interest that’s deductible.

Hawaii-Specific Tax Considerations

Federal tax planning is only half the equation. Hawaii’s unique state tax structure creates additional complexities — and opportunities.

Hawaii’s Revised Income Tax Brackets

Hawaii revised its individual income tax brackets under H.B. 2404, enacted in June 2024, with changes taking effect for tax year 2025. The key changes include widened brackets that reduce tax for most income levels. The lowest rate of 1.4% now applies to single-filer income below $9,600 (up from $2,400), while the highest rate of 11% applies to income exceeding $325,000 (up from $200,000). The standard deduction doubled from $2,200 to $4,400 for single filers.

Despite these improvements, Hawaii still has one of the nation’s most complex bracket structures with 12 brackets, and the top marginal rate of 11% remains among the highest in the country. Additional bracket widening is scheduled for 2027 and beyond.

Year-end impact: The widened brackets may change the optimal timing of income recognition. If you can defer rental income into 2026 (when brackets widen further), the savings may be worth the effort. Discuss this with your CPA.

General Excise Tax: The Hidden Layer

Hawaii’s GET applies to rental income at 4% statewide, with an additional 0.5% Oahu county surcharge, bringing the effective rate to 4.5% on Oahu. Unlike a sales tax, GET is technically imposed on the business (you), not the consumer (your tenant), though Hawaii law allows landlords to pass the tax through to tenants at a rate of 4.712% (the mathematically equivalent pass-on rate).

Year-end action items:

• Ensure your GET filings are current. If you file monthly, quarterly, or semi-annually, verify that all Form G-45 returns have been submitted by their respective deadlines (the 20th of the month following each period).
• Your annual Form G-49 reconciliation for 2025 is due April 20, 2026. Begin gathering documentation now.
• Confirm you’ve been deducting GET paid as a business expense on your federal return — it’s fully deductible and frequently overlooked.
• If you’ve been absorbing GET rather than passing it through to tenants, evaluate whether to implement pass-through for 2026 leases. On a $2,500/month rental, the 4.712% pass-through amounts to $117.80 per month — $1,413.60 annually — that goes directly to your bottom line.

Transient Accommodations Tax: Rate Change Ahead

If you operate short-term rentals (stays under 180 days), you’re subject to Hawaii’s TAT at 10.25% plus the Oahu TAT (OTAT) at 3%, for a combined 13.25% on top of GET. Here’s the critical forward-looking item: effective January 1, 2026, the state TAT rate increases from 10.25% to 11%. Combined with the 3% OTAT and 4.5% GET, your total tax burden on short-term rental income will rise to approximately 18.5%.

Year-end action item: If you’re evaluating whether to convert a short-term rental to long-term, the January 2026 TAT increase should factor into your analysis. The tax differential between short-term and long-term rental income on Oahu is now approaching 14 percentage points (18.5% combined STR taxes versus 4.5% GET on long-term rentals). As we discussed in our short-term vs. long-term rental guide earlier this year, the math increasingly favors long-term strategies for many properties outside resort zones.

Year-End Deduction Strategies

The next six weeks are your window to maximize deductions that reduce your 2025 taxable income. Here’s where to focus.

Accelerate Repairs (Not Improvements)

The IRS distinguishes between repairs (which are fully deductible in the year incurred) and improvements (which must be capitalized and depreciated over time, typically 27.5 years for residential rental property). The distinction matters enormously at year-end.

Repairs restore the property to its previous condition without adding value. Examples include fixing a leaking faucet, patching drywall, replacing broken window glass, repainting a room, and clearing a clogged drain.

Improvements add value, prolong the property’s useful life, or adapt it for new uses. Examples include installing a new split AC system, replacing an entire roof, adding a bathroom, upgrading all flooring, and renovating a kitchen.

If you’ve been putting off repairs, completing them before December 31 gives you an immediate deduction on your 2025 return. If you’re planning improvements, the restoration of 100% bonus depreciation means qualifying assets can still be deducted fully in 2025 — but the classification must be correct. Work with your CPA to categorize each expenditure properly. The IRS scrutinizes this distinction closely, and misclassification can trigger audits.

Hawaii-specific note: Given our tropical climate, many repairs happen more frequently than on the mainland. HVAC servicing, salt air corrosion repair, mold remediation, exterior repainting, and pest control are all common, recurring deductible repairs for Oahu rental properties.

Consider a Cost Segregation Study

A cost segregation study is a tax strategy that reclassifies components of your rental property into shorter depreciation categories. Instead of depreciating the entire building structure over 27.5 years, a cost segregation study identifies elements like flooring, cabinetry, appliance connections, landscaping, paving, and fencing that qualify for 5-year, 7-year, or 15-year depreciation schedules.

With 100% bonus depreciation restored, a cost segregation study can generate substantial first-year deductions. For a Hawaii property purchased for $800,000 (with $200,000 allocated to land and $600,000 to the building), a cost segregation study might reclassify 15-25% of the building value into shorter-lived categories — potentially generating $90,000-$150,000 in accelerated deductions.

Who should consider this: Owners of properties valued at $500,000+ where a cost segregation study hasn’t previously been performed. The study typically costs $3,000-$7,000, and for Hawaii’s high-value properties, the return often exceeds 10:1.

Year-end timing: To claim accelerated depreciation on your 2025 return, the study needs to be completed before you file. Commission the study now — demand increases significantly in January.

Prepay Deductible Expenses

Cash-basis taxpayers (most individual rental property owners) can deduct expenses in the year they’re paid, regardless of when the service is performed. Before December 31, consider prepaying expenses such as insurance premiums (both landlord and property insurance), property management fees, professional services (CPA, attorney), membership dues to landlord associations, and subscription services related to property management.

Important caveat: the IRS requires that prepaid expenses provide a benefit within 12 months of the payment. You can prepay your 2026 insurance premium in December 2025, but you can’t prepay two years of premiums and deduct the entire amount in 2025.

Maximize Travel Deductions

If you own Oahu rental property but live on the mainland, travel expenses to inspect, maintain, and manage your property are deductible — including airfare, ground transportation, lodging, and meals (at 50%). This deduction is frequently underutilized by off-island owners.

Year-end opportunity: If you haven’t visited your property recently, a December trip that includes property inspections, vendor meetings, and tenant interactions creates legitimate deductible travel expenses. Document the business purpose meticulously — the IRS expects more than a passing visit between beach days.

For on-island owners with multiple properties, track mileage between properties throughout the year. The 2025 standard mileage rate is 70 cents per mile. Over the course of a year, regular trips between properties add up to a meaningful deduction.

Real Property Tax Timing

Hawaii has the lowest effective property tax rate in the nation at approximately 0.32%, but on high-value island properties, even this low rate generates meaningful tax bills. Real property taxes are due in two installments: August 20 and February 20.

If you haven’t yet paid your February 2026 installment, paying it in December 2025 allows you to deduct it on your 2025 return (assuming you’re a cash-basis taxpayer and the increased SALT cap gives you room). Evaluate whether this timing shift benefits your overall tax position.

Planning for 2026: What’s Changing

Year-end planning isn’t just about 2025 — it’s about positioning yourself for 2026 and beyond.

TAT Increase (January 1, 2026)

As noted above, the state TAT rises from 10.25% to 11% on January 1, 2026. Short-term rental operators should review their pricing to account for this increase and evaluate whether the total tax burden still supports their rental strategy.

Hawaii Income Tax Brackets Continue to Widen

Hawaii’s phased bracket adjustment continues, with further widening in 2027 that will reduce the effective rate for many income levels. This means income deferred from 2025 or 2026 into later years may be taxed at lower rates. For landlords with flexibility in income timing — such as those negotiating lease terms or timing property sales — this creates planning opportunities.

Potential HECO Rate Increase

Hawaiian Electric is pursuing its first major base rate increase in five years, with potential implementation before January 1, 2027. Higher electricity costs directly affect rental property operating expenses — and may influence whether landlords include utilities in rent or pass them through to tenants. From a tax perspective, utility expenses paid by the landlord are deductible, so evaluate whether structural changes to your utility arrangements make sense for 2026.

1031 Exchange Planning

If you’re considering selling a rental property in 2026, begin your 1031 exchange planning now. A properly structured like-kind exchange under Section 1031 allows you to defer capital gains and depreciation recapture taxes when you sell a rental property and reinvest the proceeds in a replacement property.

The stakes are particularly high in Hawaii because:

• Property values are among the highest in the nation, meaning capital gains can be substantial
• If you’ve claimed depreciation for many years, recapture taxes (taxed at up to 25% federally) can be significant
• Hawaii taxes capital gains as ordinary income at state rates up to 11%

A 1031 exchange doesn’t eliminate these taxes — it defers them. But deferral in a high-value, high-tax environment like Hawaii can be worth hundreds of thousands of dollars. The identification and closing timelines are strict (45 days to identify replacement properties, 180 days to close), so having a qualified intermediary and replacement property strategy in place before you list your property is essential.

The Year-End Tax Checklist

Here’s a consolidated checklist of actions to complete before December 31, 2025:

Income and Expense Review

• Reconcile all rental income received and reported
• Verify all GET filings are current (Form G-45)
• If applicable, verify all TAT/OTAT filings are current (Form TA-1)
• Compile all deductible expenses with documentation

Deduction Acceleration

• Complete any planned repairs before December 31
• Evaluate prepaying insurance, management fees, or professional services
• Commission a cost segregation study if applicable
• Review capital expenditures for 100% bonus depreciation eligibility

Documentation

• Ensure move-in/move-out inspection records are complete for all 2025 turnovers
• Organize receipts for all repairs, improvements, and maintenance
• Document business use of vehicle (mileage log) and travel expenses
• Photograph and document the condition of all properties for insurance and depreciation purposes

Forward Planning

• Meet with your CPA to review your total 2025 tax position
• Evaluate estimated tax payment adequacy for Q4 (due January 20, 2026)
• Assess the impact of the 2026 TAT increase on short-term rental operations
• Begin 1031 exchange planning if considering a 2026 property sale
• Review entity structure (LLC, S-Corp, etc.) for optimal tax treatment

GET Compliance

• File any outstanding GET returns
• Evaluate whether to implement GET pass-through to tenants in 2026 leases
• Confirm GET number is current and displayed per Hawaii requirements

The Professional Advantage

Hawaii’s multi-layered tax environment — federal income tax, state income tax with 12 brackets and an 11% top rate, GET, TAT, OTAT, HARPTA withholding for nonresidents, property tax, and now the OBBBA changes — creates a level of complexity that catches even experienced landlords off guard. The cost of a missed deduction, a misclassified expense, or a late filing consistently exceeds the cost of professional guidance.

At Agency Rentals, our comprehensive property management services include detailed monthly financial reporting that simplifies tax preparation. Our clients receive organized income and expense statements, copies of all vendor invoices, documented maintenance records categorized as repairs versus improvements, and GET filing support. This documentation system saves our clients’ CPAs significant preparation time and ensures no deductible expense is overlooked.

We also coordinate with our clients’ tax advisors on property improvement planning, helping time expenditures for maximum tax benefit while maintaining the property in top condition for tenant retention and rent optimization.

Ready to Get Your Rental Property’s Finances in Order Before Year-End?

Contact Agency Rentals today at (808) 944-9000 or visit agencyhawaii.com for a free property analysis. Our team can help you organize your 2025 rental financials, plan improvements that maximize both property value and tax benefits, and ensure your property management systems are producing the documentation you need for efficient, accurate tax filing.