Short-Term vs Long-Term Rentals on Kauai: What the Tax Math Actually Shows

Cap Rates on Kauai Explained Simply
Perfect “math teacher” moment.

Short-term vacation rental

Let’s talk numbers. Here are Kauai’s tax rates for short-term rental property owners on Kauai.

1. Real Property Tax ($11.30-$12.20 per $1,000 assessed value)
2. GET: 4.712%
3. State TAT: 10.25%
4. County of Kauai TAT: 3%

Let’s look at a property tax assessed at $450,000 for a vacation rental. Here are the taxes by the numbers.

^$12.20/_$1,000 = ^x/_$450,000

1,000x = (12.20)(450,000)

x = ^{(12.20)(450,000)}/_1,000 = 5, 490

Property tax: $5,490

Let’s also say he rents his unit for $350/per night for 237 days a year (~65% occupancy rate). That is a gross income of $82,950 per year.

GET (4.712%): $3,908.60
State Transient Accommodation Tax (10.25%): $8502.38
Kauai Transient Accommodation Tax (3%): $2488.50

Total Tax: $20,389.48

Revenue after taxes: $62,560.52

Monthly mortgage: ~$3,850

If your only income source is from the rental income, you will have to live on $62,560.52 a year after the taxes are taken for your rental income.

The taxes amount to about 25% of the gross revenue. That does not include the cost to maintain the vacation rental, such as the maintenance fee if your vacation rental is a condominium. The profit margin for starting a vacation rental with rental income as the only source is razor-thin. The numbers are based on Hawaii and Kauai’s existing tax rates.

Long-term rentals

1. Property tax: about $5.45 per $1,000 of the assessed value
2. GET (4.712%)

Let’s look at a property assessed at $450,000

^$5.45/_$1,000 = ^x/_$450,000

1000x = (5.45)(450,000)

x = ^{(5.45)(450,000)}/₁₀₀₀ = $2, 452. 50

Let’s look at a $3,500 per month rent.

Gross income for the year: $42,000
GET (4.712%): $1,979.04

There is a significant difference between the tax for a short-term rental and that for a long-term rental.

Taxes owed to Hawaii and to the County of Kauai

Short-term rental: $20,389.48
Long-term rental: $4,431.54

From a tax perspective, you will pay a lot more taxes if you are a short-term rental property owner than a long-term property owner.

Business Expenses

When you add business expenses, such as property upkeep costs, the yearly gross revenue for a long-term rental is smaller, but the percentage of your net income is larger for long-term rentals because you pay less in taxes.

Rental Rates

The average short-term rental rate is around $200-$400 per day. If you charge anything more, visitors will find a cheaper place to stay to spend their vacation on Kauai. If you charge less than $200 per night, you might be losing out on maximizing your profit margin.

Short-term rental rates ($350 per day)

Let y = rental income and x = number of days visitors stay.

y = 350x

y = 350(237) = $82,950

Long-term rental rates ($3,500 per month)

Let y = rental income per year and x = number of months the tenant rented your property

y = 3500x

$82,950 = 3500x

x = ^$82,950/₃₅₀₀ = 23.7 months ≈ 24 months

It will take two years to make the same amount of money with a long-term rental as it would with a short-term rental.

Summary

Like any investment, a long-term projection is the most secure option, since taxes on short-term rentals as a property owner are a big part of the business. Aside from the 25% taxes, you still need to pay for the income taxes on the Federal and Hawaii income tax.

It’s not impossible to start a short-term rental income business on Kauai. However, you will need existing capital to run your business and to help you through the years when the occupancy rate on Kauai falls to 60% from the current 64.7%

It’s all a matter of risk tolerance. Are you willing to endure the growing pains of a short-term rental property owner with the vacation rental business on Kauai?