HI SB2656

Disallows the dividends paid deduction for most real estate investment trusts (REITs) beginning in taxable years after December 31, 2025, meaning REIT income generated in Hawaii would be subject to state taxation.

Exempts REITs that have investments or qualify as community development financial institutions from the dividends paid deduction disallowance.

Addresses an estimated $26,800,000 in foregone state income tax revenues in 2026 due to the current REIT dividend exemption from state-level taxation.

Notes that a 2016 study found Hawaii received only $954,842 from in-state residents paying taxes on REIT dividend income, while the majority of REIT income taxes were paid to other states by out-of-state shareholders.

Maintains existing REIT reporting requirements including mandatory notification to the department of taxation within 15 days of operation and submission of federal tax returns with state filings, with a $50 per day penalty for non-compliance.