Understanding Property Taxes in Agricultural Communities
Hawai'i County's Property Tax Rules and PMKCA's Interactive Property Tax Worksheet
On July 1 of each year, the Hawai’i Real Property Tax Office sends out property tax bills for the fiscal period beginning July 1 and ending June 30 of the following year. When you receive this bill, it’s already 6 months too late to make any changes to your property tax situation.
It’s not too late, however, to be thinking ahead about your property taxes! Any changes you might want or need to make that would affect your NEXT YEAR property tax bill must be filed by December 31.
Residents of rural, agricultural communities like Pa’auilo Mauka and Kalōpā have an additional concern, when compared to residents of more urban or more dense areas. Many of our residents have, or are considering creating, farms and ranches, but they find that the taxable value of their land can become a financial burden at tax time. The county has addressed this burden to some extent by allowing Agricultural Classifications (as opposed to the standard Homeowner Classification) that may reduce the taxable value of land that is in agriculture – thereby potentially reducing the tax bill.
There are two forms of approved agricultural designations, "Non-dedicated" and "Dedicated". Most small rural property owners in our communities who are considering agriculture choose the "non-dedicated" designation which avoids the constraints and reporting requirements of the more commercial "dedicated" designation. We are only talking here about the Non-dedicated Agricultural classification in this article.
The tax savings from classifying a property as Agricultural can be difficult and confusing to calculate and the tax criteria are changeable over time. Besides the confusion, the deadline for figuring out what each tax year’s savings is December 31 of the previous year!
Notes for 2023
The 2023 Hawaii County Council recognizes that there are some serious problems with how the Non-dedicated Agriculture Classification is applied and is currently attempting to rectify some of the problems.
While the county wants to encourage small-scale agriculture, the current property tax rules are causing property owners to abandon their plans for agriculture.
It’s unlikely that any changes will be made during this current Property Tax cycle (leading to the 2024-2025 tax bill), so read on, and give this worksheet a whirl.
PMKCA will keep on top of the county’s plans and pass information on to our members and mailing list.
PMKCA, on behalf of our communities, has put some effort into trying to understand this “Agricultural vs. Homeowner” Classification dilemma, and to provide guidance and tools that would help residents make the best decision possible for the next tax period, before the current year ends!
Note: Don’t confuse the “Homeowner Classification” with the “Homeowner Exemption.” The Homeowner Classification means your property is primarily a residence without any significant agriculture being practiced on it. The Homeowner Exemption gives you a tax break for LIVING on your property, whether or not you are also doing agriculture.
Before we get started, there are five considerations regarding property tax calculations that should be kept in mind:
1. Once again, if you want to make a change in your Classification and future tax bill, you must do so by the end of the year - before you receive your March property tax assessment letter telling you the new ASSESSED VALUE of your property, and before any changes to the TAX RATES might be enacted (around June). In other words, you must make the best guess possible, without having all the new data.
2. The TAX RATE used when a property is in the Agricultural Classification is HIGHER than the tax rate for a Homeowner Classification. (The tax calculation for either classification is: TAX RATE multiplied by each $1,000 of TOTAL ASSESSED VALUE.) The 2023 Tax Rate for properties in the Agricultural Classification was $9.35 per $1,000 of Total Assessed Value, compared to $6.15 per $1,000 for the Homeowner Classification. You might reduce the assessed land value (by virtue of having an Agricultural Classification) but you could still pay more in taxes due to the higher tax rate of the Ag Classification!!
3. A benefit that is available with the Homeowner Classification isn’t applied to the Agricultural Classification! This can be a “gotcha” and you might see the effect in your March Assessment Letter! The rules for the Homeowner Classification put a 3% cap on the INCREASE in Assessed Value that your HOME can receive in any year. In a year in which property values on homes have increased sharply (think 2021 & 2022), the Homeowner Class property would be protected by this cap. However, an Agricultural Class property would be taxed for the full increase in the home's assessed value! Yikes! A double whammy! Taxed at a higher rate (Point 2) on a big increase in the value of the home (Point 3)!
4. The Hawaii County Council and the Property Tax office may make changes to the Tax Rates and other rules that might affect our property taxes, practically up to the month the tax bills are printed and mailed. Property owners won’t know some of the details affecting our taxes until long after they might have been able to make a change. But being informed makes residents more powerful in advocating for our personal needs, as well as those of our community and our island.
5. When a piece of land is classified as being used for a specific TYPE of agriculture, the ASSESSED VALUE of the land is reduced by a factor that is pre-assigned to that type of agriculture. (See below.) As a result, for example, land that is used for “pasture” has an assessed value that is less than land that is used for an “orchard”. You pay less in taxes for pasture land.
OK! Enough said. Download the Property Tax Worksheet (click the green button), read the guide below, and "try see" what changing your tax classification might do to your future (next July) tax bill.
Introduction to PMKCA's Interactive Property Tax Worksheet
Calculating the taxes for different property tax change scenarios (Changing your classification from Homeowner to Agricultural, or from Agricultural to Homeowner) can be daunting. Yet you may find that you save money on your property taxes by making an informed estimate of the impact of such a change for your property. In some circumstances (see the story below), NOT making a change to your classification - or missing the year end deadline for making the change! - can have very expensive consequences when your tax bill arrives.
If you think that you may benefit from making a change in your classification, you MUST submit the paperwork before the end of the prior calendar year to have the change apply to the following year’s taxes. (For example, to reduce your 2024-2025 property taxes, you must submit your changes by December 31, 2023.)
A case in point – AGRICULTURAL CLASSIFICATION may not be the best choice!!
This happened to a Pa'auilo resident in 2022 (for property taxes paid in 2022-2023). Five years earlier they had applied for and received an Agricultural Classification. They had generated a small benefit over the years from having the assessed value of their LAND reduced because it was in agriculture (pasture and a few other things).
Then they received the March 2022 Property Taxes Assessment Notice for their property and discovered that the “Total Assessed Value” (House and Land) had gone up almost 20%!! What? Why? They called the Property Tax office and were told that the assessor had determined that the value of the house was almost 20% greater than it had been in 2021 ("due to comparable sales"). And no 3% CAP on that increase was in place because of their Agricultural classification.
So, the resident was taxed at the higher Agricultural classification rate ($9.35/$1,000) on the FULL Assessed Value (no 3% cap!) of their property! The tax bill for 2022-2023 increased by over $1,200! The resident had no recourse, because THE DEADLINE FOR CHANGES HAD PASSED (Point 3)!
Even when the property owner appealed, and returned to the Homeowner Classification, the effect of the change in the home's assessed value was not reversed. The 2022 over-inflated value of the house can’t be easily changed and will affect their taxes for years to come.
Here’s how to experiment with changing your classification:
Begin by locating your current year Property Taxes Assessment Notice (mailed each year in March), or go to the Hawaii County Property Tax website (https://www.hawaiipropertytax.com/search.html) and search for your property records. From your assessment notice, you will need your current classification (Homeowner or Agricultural) and various assessment values for your property.
Then click on the "Property Tax Worksheet" button (above) to download the “Property Tax Calculation Worksheet” to your device. The worksheet is in MS Excel format. You will be asked to open the worksheet in Excel, or you may choose another tool which mimics Excel.
When the worksheet opens, you will likely see a security warning message at the top, followed by an “Enable Editing” button. Click the “Enable Editing” button so that you can add your data and perform the interactive functions and calculations in the worksheet. (While we can assure you that the worksheet resides in a secure location, you may choose to stay in the non-edit state, in which case you can print the document and use it as a guide as you do the calculations by hand.)
The worksheet first asks you to refer to your Assessment Notice to give your CURRENT classification and to provide some details from your Assessment Notice. Enter your values in the appropriate input boxes. These values become the basis for your “What if…” calculations later.
Next, you are asked to scroll down to the section you want to experiment with: Agricultural to Homeowner, or Homeowner to Agricultural.
When you’re done with your calculations, you’ll see a comparison of your current potential tax amount AGAINST your hypothetical CHANGED tax amount… that is, if all the Property Tax office variables (see above) don’t change before you get your bill.
The Worksheet’s two Calculation Sections
“I want to test the Homeowner Calculation.” (Perhaps you are currently classified as “Agricultural”, and you are considering changing to the Homeowner Classification.)
You’ll find that you don’t have to enter any NEW information! What appears in the boxes is derived from the Assessment Notice values you entered earlier. Easy-peasy! You will see the tax comparison between your current Agricultural classification and a potential Homeowner classification.
“I want to test the Agricultural Calculation.” (What if you are currently classified as “Homeowner”, and you are considering changing to the Agricultural Classification. Or you are already classified as “Agricultural”, and you want to consider making adjustments to your ag pursuits.)
The calculations in this section are a bit more complicated and require that you speculate on the TYPE(S) OF AGRICULTURE you want to perform, and how much of your land you might devote to each type. The objective, tax-wise, is to reduce the assessed value of your LAND, thus reducing (hopefully) the property taxes you will owe overall.
First of all, you are asked to give the total acreage of your property. There’s math coming up! Then the worksheet allows you to “carve up” your land (except for the house) to see how much benefit you might derive based on different agricultural scenarios.
The Property Tax office publishes the types and associated values of agriculture that might be practiced on property classified as Agricultural. Click the button below to see the current types and land assessment values.
The most highly valued agricultural land (“Intensive Agriculture”) would receive an assessed value of $4,000 per acre. The usable land with the least value (“Poor Pasture or Grazing”) is rated at $28 per acre. For example, your three acres of poor pasture would give you a bigger tax break than 3 acres of truck crops or beekeeping. The idea behind this calculation is that you are not likely to make as much income from an acre of poor pasture with a few sheep than from many hives of bees on the same acre.
So, go ahead, play with your agricultural dreams! The result will likely be a REDUCTION in the assessed value of your land, and potentially a reduction in the property taxes you owe on the land. Yay!
(This discussion of Property Taxes and the associated Worksheet are produced by PMKCA members and rely on information that can be changed without notice. If you find any calculation errors or other concerns, please let us know. The Hawaii County Property Tax office and the County Council are the authorities in property tax matters.)