§235-5.5  Individual housing accounts. (a)  There shall be allowed as a deduction from gross income the amount, not toexceed $5,000, paid in cash during the taxable year by an individual taxpayerto an individual housing account established for the individual's benefit toprovide funding for the purchase of the individual's first principalresidence.  A deduction not to exceed $10,000 shall be allowed for a marriedcouple filing a joint return.  No deduction shall be allowed on any amountsdistributed less than three hundred sixty-five days from the date on which acontribution is made to the account.  Any deduction claimed for a previoustaxable year for amounts distributed less than three hundred sixty-five daysfrom the date on which a contribution was made shall be disallowed and theamount deducted shall be included in the previous taxable year's gross incomeand the tax reassessed.  The interest paid or accrued within the taxable yearon the account shall not be included in the individual's gross income.  Forpurposes of this section, the term "first principal residence" meansa residential property purchased with the payment or distribution from theindividual housing account which shall be owned and occupied as the only homeby an individual who did not have any interest in, individually, or whosespouse did not have any interest in, if the individual is married, aresidential property within the last five years of opening the individualhousing account.

In the case of a married couple filing separatereturns, the sum of the deductions allowable to each of them for the taxableyear shall not exceed $5,000, or $10,000 for a joint return, for amounts paidin cash, excluding interest paid or accrued thereon.

The amounts paid in cash allowable as a deductionunder this section to an individual for all taxable years shall not exceed$25,000, excluding interest paid or accrued.  In the case of marriedindividuals having separate individual housing accounts, the sum of theseparate 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 inHawaii for the exclusive benefit of an individual, or, in the case of a marriedindividual, for the exclusive benefit of the individual and spouse jointly, butonly if the written governing instrument creating the trust meets the followingrequirements:

(1)  Contributions shall not be accepted for thetaxable year in excess of $5,000 (or $10,000 in the case of a joint return) orin excess of $25,000 for all taxable years, exclusive of interest paid oraccrued;

(2)  The trustee is a bank, a savings and loanassociation, a credit union, or a depository financial services loan company,chartered, licensed, or supervised under federal or state law, whose accountsare insured by the Federal Deposit Insurance Corporation, the National CreditUnion Administration, or any agency of this State or any federal agency establishedfor the purpose of insuring accounts in these financial institutions.  Thefinancial institution must actively make residential real estate mortgage loansin Hawaii;

(3)  The assets of the trust shall be invested only infully insured savings or time deposits.  Funds held in the trust may becommingled for purposes of investment, but individual records shall bemaintained by the trustee for each individual housing account holder which showall transactions in detail;

(4)  The entire interest of an individual or marriedcouple for whose benefit the trust is maintained shall be distributed to theindividual or couple not later than one hundred twenty months after the date onwhich the first contribution is made to the trust;

(5)  Except as provided in subsection (g), the trusteeshall not distribute the funds in the account unless it (A) verifies that themoney is to be used for the purchase of a first principal residence located inHawaii, 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 theaccount and remits this amount to the director within ten days after the dateof the withdrawal.  The amount so withheld shall be applied to the liability ofthe taxpayer under subsections (c) and (e); and

(6)  If any amounts are distributed before theexpiration of three hundred sixty-five days from the date on which acontribution is made to the account, the trustee shall so notify in writing thetaxpayer and the director.  If the trustee makes the verification required inparagraph (5)(A), then the department shall disallow the deduction undersubsection (a) and subsections (c), (e), and (f) shall not apply to thatamount.  If the trustee withholds an amount under paragraph (5)(B), then thedepartment shall disallow the deduction under subsection (a) and subsection (e)shall apply, but subsection (c) shall not apply.

(c)  Any contributions paid or distributed outof an individual housing account shall be included in gross income by theindividual for whose benefit the account was established for the taxable yearin which the payment or distribution is received, unless the amount is usedexclusively in connection with the purchase of the first principal residence inHawaii for the individual for whose benefit the account was established.

(d)  The transfer of an individual's interestin an individual housing account to a spouse under a dissolution of marriagedecree or under a written instrument incident to a dissolution of marriageshall not be considered a taxable transfer made by the individual, and theinterest, at the time of the transfer, shall be treated as part of anindividual housing account of the transferee, and not of the transferor.  Afterthe transfer, the account shall be treated, for purposes of this section, asmaintained for the benefit of the transferee.

(e)  If a distribution from an individualhousing account to an individual for whose benefit the account was establishedis made and not used in connection with the purchase of the first principalresidence in Hawaii for the individual, the tax liability of the individualunder this chapter for the taxable year in which the distribution is receivedshall be increased by an amount equal to ten per cent of the amount of thedistribution which is includable in the individual's gross income for thetaxable year.

If, during any taxable year, the individualuses the account or any portion thereof as security for a loan, the portion soused shall be treated as if it had been distributed to that individual.

(f)  If the individual for whose benefit theindividual housing account was established purchases a residential property inHawaii with the distribution from the individual housing account:

(1)  Before January 1, 1990, and if the individualsells in any manner or method or by use of any instrument conveying ortransferring the residential property, the gross income of the individual underthis chapter for the taxable year in which the residential property is sold,conveyed, or transferred, whichever is applicable, shall include an amountequal to the amount of the distribution from the individual housing account,and in addition, the gross income of the individual shall be increased by anamount equal to ten per cent of the total distribution from the individualhousing account; or

(2)  After December 31, 1989, the individual shallreport one-tenth of the total distribution from the individual housing accountused to purchase the residential property as gross income in the taxable yearin which the distribution is completed and in each taxable year thereafteruntil all of the distribution has been included in the individual's grossincome at the end of the tenth taxable year after the purchase of theresidential property.  If the individual sells in any manner or method or byuse of any instrument conveying or transferring the residential property, thegross income of the individual under this chapter for the taxable year in whichthe residential property is sold, conveyed, or transferred, whichever isapplicable, shall include an amount equal to the amount of the distributionfrom the individual housing account not previously reported as gross income,and in addition, the tax liability of the individual shall be increased by anamount equal to ten per cent of the total distribution from the individualhousing account.  If the individual sells the residential property in anymanner as provided in this paragraph after all of the distribution has beenincluded in the individual's gross income at the end of the tenth taxable yearafter the purchase of the residential property, the tax liability of theindividual shall not be increased by an amount equal to ten per cent of thetotal distribution from the individual housing account.

An individual who purchased a residential propertyin Hawaii with the distribution from an individual housing account beforeJanuary 1, 1990, who is subject to paragraph (1) may elect to report asprovided in paragraph (2).  The election shall be made before January 1, 1991. If the individual makes the election, the individual shall report one-tenth ofthe total distribution from the individual housing account as gross income inthe taxable year in which the election occurs and in each taxable yearthereafter until all of the distribution has been included in gross income asprovided by paragraph (2).  If the individual making the election sells theresidential property in any manner as provided in paragraph (2), then theindividual shall include as income the amount of the distribution notpreviously reported as income and increase the individual's tax liability asprovided in the second sentence of paragraph (2), except when the thirdsentence of paragraph (2) applies.

In the alternative, any individual subject toparagraph (2) who established the individual housing account before January 1,1990, may elect within one year after the date of purchase, to be subject toparagraph (1).

(g)  No tax liability shall be imposed underthis section if:

(1)  The payment or distribution is attributable tothe individual dying or becoming totally disabled; or

(2)  Residential property subject to subsection (f) istransferred by will or by operation of law or sold due to the death or totaldisability of an individual or individual's spouse,

subject to the following:

An individual shall not be considered to betotally disabled unless proof is furnished of the total disability in the formand manner as the director may require.

Upon the death of an individual for whosebenefit an individual housing account has been established, the funds in theaccount shall be payable to the estate of the individual; provided that if theaccount was held jointly by the decedent and a spouse of the decedent, theaccount shall terminate and be paid to the surviving spouse; or, if thesurviving spouse so elects, the spouse may continue the account as anindividual housing account.  Upon the total disability of an individual forwhose benefit an individual housing account has been established, theindividual or the individual's authorized representative may elect to continuethe account or terminate the account and be paid the assets; provided that ifthe account was held jointly by a totally disabled person and a spouse of thatperson, then the spouse or an authorized representative may elect to continuethe account or terminate the account and be paid the assets.

(h)  If the individual for whose benefit the individualhousing account was established subsequently marries a person who has or hashad any interest in residential property, the individual's housing accountshall be terminated, the funds therein shall be distributed to the individual,and the amount of the funds shall be includable in the individual's grossincome for the taxable year in which such marriage took place; provided thatthe tax liability defined under subsection (f) shall not be imposed.

(i)  The trustee of an individual housingaccount shall make reports regarding the account to the director and to theindividual for whom the account is maintained with respect to contributions,distributions, and other matters as the director may require under rules.  Thereports shall be filed at a time and in a manner as may be required by rulesadopted under chapter 91.  A person who fails to file a required report shallbe subject to a penalty of $10 to be paid to the director for each instance offailure to file. [L 1982, c 285, §2; am L 1986, c 231, §2; am L 1990, c 99,§§1, 2; am L 1992, c 183, §§1, 2; am L 1994, c 49, §1; am L 1998, c 120, §2]