If you have not bought or sold property in Hawaii, chances are nearly zero that you have ever heard of HARPTA. That raises the question, “What is HARPTA?” HARPTA, or the Hawaii Real Property Tax Act, is an important piece of legislation that can impact a seller’s proceeds at the closing of a sale. This law affects non-resident property sellers in the Aloha State. 

Whether you’re considering selling your Maui home or have already started the process, understanding HARPTA ensures no surprises when your sale closes. In this comprehensive guide, we’ll break down everything you need to know about HARPTA, who it impacts, and what it means for your sales proceeds at closing.

Key Takeaways:

1. HARPTA Overview: HARPTA (Hawaii Real Property Tax Act) is a state law requiring a 7.25% withholding on the sale price of Hawaii real estate by non-resident sellers to ensure proper tax payment on capital gains.
2. Who HARPTA Affects: It primarily impacts non-resident property sellers, including individuals, corporations, and trusts not based in Hawaii.
3. HARPTA is Not Your Final Tax: The 7.25% withholding is not the final tax liability. The 7.25% withhold is on the total sales price. The actual tax is 7.25% on the gains from the sale.
4. HARPTA Exemptions: Hawaii residents, sellers participating in a 1031 tax-deferred exchange, and sellers losing money on a sale may be eligible for an exemption.
5. HARPTA vs. FIRPTA: While HARPTA applies to non-residents selling Hawaii real estate, FIRPTA is a federal law targeting foreign sellers of U.S. property. HARPTA has a 7.25% withholding rate, while FIRPTA’s is 15%.

What Exactly is HARPTA?

HARPTA, or the Hawaii Real Property Tax Act, is a state law designed to ensure the state can collect taxes on capital gains from property sales, even when the seller is not a Hawaii resident. The state legislature passed the law after the Hawaii Department of Taxation struggled to collect capital gains taxes from non-residents.

It requires withholding a portion of the proceeds from the sale of Hawaiian real estate by non-residents. Specifically, HARPTA applies a withholding rate of 7.25% of the sales price, collected at closing, to ensure tax compliance on property sales.

Who Does HARPTA Affect?

HARPTA primarily impacts non-resident sellers of Hawaii real estate. If you’re not a resident of Hawaii and you’re selling property in the state, you’ll likely be subject to HARPTA withholding. 

A non-resident seller can be an individual who resides outside of Hawaii, a corporation or partnership formed outside of Hawaii, or a trust or estate with non-resident trustees, executors, or administrators.

Understanding HARPTA Withholding

Under HARPTA, the standard withholding rate is 7.25% of the total sales price. This amount is withheld at closing and remitted to the Hawaii Department of Taxation. 

For example, if you’ sell a property for $500,000, the amount withheld would be $36,250. It’s important to note that this withholding typically exceeds your final tax liability. Instead, it’s an estimated payment to ensure compliance with Hawaii tax laws.

The state legislature did not arbitrarily choose the 7.25% number for HARPTA. It mirrors Hawaii’s Capital Gains rate of 7.25%. Of course, that tax is on just the gains from the sale. That’s why the HARPTA withhold is typically much larger than the actual tax.

Exemptions on HARPTA Withholding

While HARPTA applies to most non-resident property sales, there are certain situations where you might be exempt from HARPTA withholding. Potential exemptions include the principal residence exemption, like-kind exchanges (also known as 1031 exchanges), sales where the seller shows no gain, and sales where the seller may have to bring money to the table for closing.

Immediate Exemptions

If you are a Hawaii “resident” selling your home, your sale is not subject to HARPTA. If there is a non-recognition provision in the IRS tax code regarding gains from your sale, you are not subject to HARPTA. The most common non-recognition provision is a 1031 Tax Deferred Exchange. Other examples include foreign sellers from countries with tax treaties prohibiting withholdings and the transfer of property between spouses related to a divorce settlement. The third example is the sale of your main residence over the last year when the sales price was $300,000 or less.

Sellers in the above scenarios need to fill out an N-289 form. Sellers should receive the form via escrow shortly after they go under contract. After the seller completes the form, it needs to be approved by the buyer before being remitted to the state.

Exemptions Requiring Review and Approval

Suppose you aren’t eligible for a waiver for the reasons above. In that case, there are other circumstances where you may be exempt from HARPTA withholding subject to the review and approval of the Hawaii State Department of Tax. The main reason is that you did not see any actual gains from your sale. If you are selling your home for a loss, you can file form N288B.

You must submit the form to the state no later than ten business days before the scheduled close of the transaction. We advise sellers to notify escrow as soon as they open escrow so all parties may submit the form with plenty of time to spare.

The seller should also include the closing statement from when they purchased the property and an estimated closing statement for the current sale. If you made improvements to the property that could impact your tax basis, you should include invoices and contracts from contractors. If you rented the property, include a depreciation schedule in your accompanying documentation.

You can also submit an N288B form if the sale proceeds are insufficient to cover your HARPTA withholding. If you need to bring cash to close to cover your HARPTA obligations, the State Department of Tax may approve a reduction of your withholding.

It is worth reviewing your sales situations with a CPA familiar with Hawaii tax laws prior to listing your property. They may be able to let you know if you are eligible for an immediate waiver or in a situation where you could apply for a waiver.

Who is Responsible for HARPTA Being Withheld?

One of the peculiarities of HARPTA is that the buyer or purchaser of the property is responsible for ensuring that funds and paperwork are remitted to the state when the property sells. Yes, you read that right. While the withheld funds come from the seller’s proceeds, the buyer must ensure the seller’s funds go to the state. That said, buyers can rest assured that the title and escrow company works hand in hand with the buyer and seller to ensure that the state receives the necessary payment and paperwork at closing.

The property buyers should retain copies of HARPTA related forms after closing for proof of compliance. Failure to submit appropriate paperwork to the state or to withhold funds comes with stiff penalties. Trying to evade the holding is a Class C felony with the potential for significant fines and jail time.

Obtaining Refunds on HARPTA Overpays

As mentioned above, the amount withheld for HARPTA typically exceeds the actual tax liability on the gains from a sale. There are two ways to get a refund.

The first and most basic method is to file a Hawaii State Tax return as soon as possible the following year. Depending on when your sale closes, you may not be too excited to leave your funds tied up with the state for an extended period. To get your money back faster, you can file an N288C for an early “tentative refund.” You can submit your N288C form as soon as you receive an acknowledgment from the state that they received your withholding payment.

Typically, it takes 60-75 days to receive your refund once you submit your N288C form. It is important to note that if you file an N288C, you must still file a Hawaii income tax return the following year.

Steps to Comply with HARPTA

The bulk of the work to comply with HARPTA occurs during the initial and final stages of the sale. The good news is that the title and escrow company works hand in hand with the sellers and the buyers to provide appropriate forms and ensure HARPTA is withheld. Here are the five steps a seller should follow to comply with HARPTA.

1. Determine Your Residency Status: Confirm whether you’re considered a non-resident seller under HARPTA. This is crucial as HARPTA only applies to non-residents.
2. Work with escrow to determine what HARPTA related forms to fill out: Escrow provides sellers with a copy of the N-289 form shortly after buyer and seller agree to terms, and escrow opens. If you aren’t eligible to file an N-289, you may be eligible to apply for an exemption via an N-288B form.
3. Withholding at Closing: If you’re not exempt, ensure escrow withholds the correct amount (7.25% of the sales price) at closing. Have escrow file an N-288 form with any withholding remitted to the state.
4. Apply for a Refund (if applicable): If the amount withheld exceeds your actual tax liability, you can file a “tentative refund” with the Hawaii Department of Taxation using form N-288C.
5. File Hawaii Tax Returns: After the sale, file the appropriate Hawaii tax returns to report the transaction and any gain or loss. If you did not fill an N-288C form, you will receive a refund from the state if your HARPTA withholding exceeded your actual tax liability.

By following these steps, you can ensure compliance with HARPTA and avoid any potential issues during your property sale in Hawaii.

HARPTA vs. FIRPTA: Understanding the Difference

It’s common for sellers to confuse HARPTA with FIRPTA (Foreign Investment in Real Property Tax Act). While both involve tax withholding on property sales, they serve different purposes and apply to different groups.

HARPTA is a state law that applies to non-resident sellers, including U.S. citizens living outside Hawaii and has a 7.25% withholding rate. 

On the other hand, FIRPTA is a federal law that applies to foreign sellers (non-U.S. citizens or resident aliens) and typically has a 15% withholding rate, with some exceptions. Most foreign sellers are subject to both HARPTA and FIRPTA.

Navigating Potential HARPTA Challenges

Dealing with HARPTA can present several challenges for non-resident sellers. One common concern is cash flow, as the 7.25% withholding can be substantial. Suppose you are planning on redeploying the funds from your sale. In that case, it is important to factor in the amount deducted for HARPTA or the time necessary to obtain a “tentative refund” via an N288C or from filing your tax returns.

Remember that HARPTA is separate from federal tax obligations, so ensure you address state and federal tax requirements.

Tips for a Smooth HARPTA Experience

To make your HARPTA experience as smooth as possible, consider these additional detailed tips:

Work with Experienced HARPTA Professionals 

Engage a real estate agent and tax advisor familiar with Hawaii’s unique tax laws. Look for professionals who have a track record of handling HARPTA transactions. 

An experienced real estate agent can guide you through the selling process with HARPTA in mind, while a knowledgeable tax advisor can help you navigate the complexities of Hawaii’s tax laws, potentially identifying exemptions or strategies to minimize your tax liability.

Keep Detailed Records 

Maintain thorough documentation of your property purchase, improvements, and sale to calculate your tax liability accurately. 

This includes:

• Original purchase documents and closing statements
• Receipts for all capital improvements made to the property
• Annual property tax statements
• Documents related to any previous refinancing
• Records of depreciation taken (if the property was used as a rental)

Detailed records can help you establish your cost basis, potentially reducing your capital gains and, consequently, your tax liability.

Contact The Maui Real Estate Team

If you have questions about HARPTA or any other facets of the sales process, Contact the Maui Real Estate Team. If it is a tax question, we would be happy to direct you towards a qualified CPA to address your questions if you don’t have a tax advisor already.

Last week, I blogged about the settlement between the National Association of Realtors (NAR) and the Department of Justice (DOJ) and how it impacts buyers. Today, I wanted to discuss how the settlement impacts sellers.

Background on the Settlement

The National Association of Realtors and the Justice Department reached a settlement on March 15, 2024, regarding the business practices of real estate brokerages and consumers. The Settlement stemmed from a series of class action lawsuits by sellers against real estate brokerages over commissions for buyer’s brokerages. While the DOJ was not a direct party in these suits, they were already investigating buyer brokerage compensation. The Settlement included practice changes that took effect on August 17, 2024.

How will this Impact Sellers?

Realtors can no longer show cooperating compensation (payment to Buyer’s agents) in the Multiple Listing Service. A Real Estate Brokerage may list the commission they are offering on its website or advertise it in a publication or online, but not in the MLS.

What does this mean for listings?

What we know for sure:

• There will be confusion for some time. The rollout has not been particularly orderly or well handled. Even the experts have questions.
• There will be new and different contracts for both Buyers and Sellers. As of August 17, the Hawaii Association of Realtors have a new Exclusive Right to Sell Listing Agreement, Buyer Representation Agreement, and a new Purchase Contract available. Existing listings either executed a new listing agreement or amended their current one. An amendment determined if and how the seller would compensate any Buyer’s Agents.
• Broker commissions are not set by law and are negotiable.

Important things for you to know:

• You may choose to offer compensation to the Buyer’s agent.
• You may also elect not to offer any Buyer’s Agent compensation.
• You may also choose to negotiate a Buyer’s Agent’s compensation as a part of any transaction.
• You may also offer additional concessions to a Buyer to help them compensate their Agent.

What we aren’t sure about:

• How will buyers and buyers’ agents react to the Settlement Agreement? Will Buyers agree to compensate their Buyers’ agents, or will they expect Sellers to continue to offer compensation?
• Will this settlement continue in its current form or be revised? It’s no secret that the DOJ doesn’t love the settlement. It sounds as if they would prefer new practices that prohibit any compensation from the seller to the buyer’s brokerage. The DOJ and NAR are set to meet again in November.

What We are Recommending to our Sellers

While it is the seller’s choice whether to compensate the buyer’s broker, we believe the wisest course of action is to continue offering a cooperating broker fee as was commonplace before August 17th, or at minimum, be willing to negotiate a commission for a bona fide offer from a Buyer’s Agent. The current market conditions favor buyers for most segments of the Maui Real Estate market. Shifting the commission to be an out-of-pocket expense for buyers may reduce a seller’s pool of prospective buyers.

The County of Maui has announced new property tax rates for the 2024/2025 fiscal year. Rates went up in a number of different categories to address both the property taxes lost and the significant additional expenses incurred due to the 2023 fires. The bulk of the increases were focused on second homes and vacation rental condos. The only homeowner rate that increased was for homes that are assessed for more than $3,000,000.

Maui 2024/2025 Property Tax Rates

Here are the updated rates for Maui County in 2024/2025. If there is any change in rates, last years rates are noted for reference. All rates shown below are per $1,000 of assessed value.

Owner Occupied

• Tier 1: up to $1,000,000 Formerly $1.90 now $1.80
• Tier 2: $1,000,001 to $3,000,000 Unchanged $2.00
• Tier 3: more than $3,000,000 Formerly $2.75 now $3.25

Non Owner Occupied

• Tier 1: up to $1,000,000 formerly $5.85 now $5.87
• Tier 2: $1,000,001 to $4,500,000 formerly $8.00 now $8.50
• Tier 3: more than $4,500,000 formerly $12.50 now $14.00

Apartment

• Unchanged $3.50

Hotel and Resort

• Unchanged $11.75

Timeshare

• Unchanged $14.60

Short-Term Rental

• Tier 1: up to $1,000,000 formerly $11.85 now $12.50
• Tier 2: $1,000,001 to $3,000,000 formerly $11.85 now $13.50
• Tier 3: more than $3,000,000 formerly $11.85 now $15.00

Long-Term Rental

• Tier 1: up to $1,000,000 Unchanged $3.00
• Tier 2: $1,000,001 to $3,000,000 Unchanged $5.00
• Tier 3: more than $3,000,000 Unchanged $8.00

Agricultural

• Unchanged $5.74

Conservation

• Unchanged $6.43

Commercial

• Unchanged $6.05

Industrial

• Unchanged $7.05

Commercial Residential

Prior to this year, there were no tiers for commercial residential. There are now three price tiers. The tiers are the same as other property tax classifications that use tiers.

• Tier 1: up to $1,000,000 formerly $4.50 now $4.00
• Tier 2: $1,000,001 to $3,000,000 formerly $4.50 now $5.00
• Tier 3: more than $3,000,000 formerly $4.50 now $8.00

Check out the county’s description of different property type classifications if there is any confusion on what category your current property or future property might fit into. If you are relocating to the island and intend to use the home as your primary residence, please pay attention to eligibility for the homeowner tax classification.

Maui Homeowner and Long Term Rental Exemptions

If you have a primary residence on Maui or own a property that you rent long term, you may be eligible to reduce your tax bill. Under the homeowner (primary residence) exemption, residents are eligible for a $200,000 reduction on their assessed value. The long term rental exemption also provides a $200,000 reduction on the assessed value if your tenant has a year lease or longer. If you have a long term rental on the same property as your primary residence, you may be eligible for a $300,000 total reduction on your assessed value.

The deadline to file for the homeowner or long term rental exemptions for this coming fiscal year passed. If you file by the end of 2024, you would be eligible for the exemption and tax rate for the 2025/2026 fiscal year. Here is the link to the Long Term Rental Exemption and the Home Owner Exemption forms. As noted above, the rules for eligibility for the homeowner exemption can be confusing. It is worth reading the county Exemption FAQ to better understand eligibility requirements.

Maui Property Tax Notable Dates

The new rates go into effect at the start of the new fiscal year on July 1st, 2024. Property taxes are due in two separate installments. The first installment is due in August 2024 with the second installment in February 2024. Owners should have received notification of their new assessed values in March of 2024. Anecdotally, the county increased assessed values for a significant number of properties around the island. In some cases, the increase in assessments was substantial.

After over a decade of collaboration between the community and the county, Maui County’s Planning Commission approved updates to the Special Management Area (SMA) and Shoreline Rules. The updates bring more balance and flexibility for homeowners, while also improving coastal resilience for the environment. On March 28, the Maui Planning Commission voted 8-0 to approve significant changes to the rules.

Maui County originally established SMA and Shoreline Rules in the early 1970s to create shoreline building setbacks in sensitive coastal areas. However, the existing setback formula only considered historical erosion rates and did not factor in worsening conditions due to sea level rise.

The updated SMA and Shoreline Rules reflect many years of work from the Maui County Planning Department, the Maui Planning Commission, and community working groups. The new rules incorporate the best available science on sea level rise to bolster coastal resilience. When the new rules take effect, the public will be able to access the shoreline map on the Planning department’s website. The department will also hold public outreach to inform and train residents on the changes.

Highlights of the New Rules

• Creates categorical exemptions, allowing people to bypass submitting an SMA assessment or permit application if proposed work has minimal to no environmental impact. For example, repairs and upgrades to the interior of homes, with a valuation of less than $500,000 in any 24-month period, within the special management area including the shoreline area are allowed, unless they are seeking expansion or intensifying the use.
• Removes the mandatory requirement of certified shoreline surveys, which cost thousands of dollars, and instead leaves the decision to the discretion of the department.
• Reduces the permitting burden for state-required conversion of cesspools.
• Requires hazard mitigation plans that consider realignment of structures away from the shoreline if existing structures are exposed to coastal hazards.

The new rules are more balanced and flexible for homeowners, while incorporating the best available science on sea level rise to bolster coastal resilience. This represents the second major update since 2003, with future reassessments based on erosion rates and the best science available planned every decade.

The SMA and Shoreline areas, managed by state and county laws, are the most sensitive parts of the coastal zone. The Special Management Area is the area of the island that is close to the shoreline, generally beginning at the shoreline and extending inland to the nearest highway. The Shoreline area is the land between the shoreline and the shoreline setback line.

The updated rules provide a foundation for further progress and a step forward in balancing the needs of homeowners and protecting the environment. The Hawaii Sea Level Rise Vulnerability and Adaptation Report, a guiding document for coastal planning around the state, urges people to plan for 3.2 feet of sea level rise now and adjust the projection upward in years to come. The updated SMA and Shoreline Rules represent a significant milestone for Maui County in addressing the challenges of coastal resilience and planning for the future.

This should also of course provide additional clarity for buyers interested in purchasing oceanfront land or remodeling or expanding on an existing oceanfront home.

For most buying a home on Maui is a lifestyle choice. We aren’t a center of commerce. You don’t come here for shopping or night life. It takes a minimum of five hours to get here via plane. People buy homes on Maui for natural beauty, climate and for the general lifestyle offered. For the North Shore of Maui, the ocean and the world class water sports offered are an integral part of that lifestyle. We recently hosted a broker’s event that was a little unusual. With a couple of listings that really appeal to those who love ocean sports, Billy and Martin came up with an idea that highlighted the amazing attributes of these two respective properties.

The Maui Real Estate Team invited a group of ocean sport loving Realtors for a downwind coast run that started at our listing at 78 Aleiki Place on Kuau Point and ended at Sugar Cove Building 6 in Spreckelsville. Most of the participants used wing foils to go down the coast. We had one agent riding a stand up foil and Kai Lenny used his kite. Kai’s brother Ridge, who is an agent in our office, narrates the video below that shows highlights from the event.

The condominium home at 78 Aleiki is just steps from the Kuau Point launch. If you like to wing, windsurf, SUP, or surf. There are a couple of surf breaks accessible just off the point. Of course, it’s also a great spot for starting a downwind run to Spreckelsville, Kanaha Beach Park or Kahului Harbor. Sugar Cove is a great spot for pretty much any ocean sport you can imagine. Surf, SUP, kite, windsurf, wing, body board or body surf off this great little beach.

Needless to say, the participants said this was a lot more fun than any other real estate event they ever attended. Not only was it a good chance to highlight the two properties, it was also a good reminder to all participants on just how lucky we are to call Maui our home.

Contact The Maui Real Estate Team

If you have questions about either of these properties, give us a call at 1 800 579 1525. We would be happy to answers questions or provide additional service.

The Maui market is changing. Needless to say, we aren’t immune to the latest increases to interest rates. Days on market are getting longer with buyers fewer. While there will still be buyers seeking Maui’s amazing lifestyle, the easy days for sellers are coming to an end. In this market, sellers need top quality representation. The Maui Real Estate Team uses high quality photography, videography and creative marketing like the broker’s event highlighted here to help properties stand out. Contact The Maui Real Estate Team if you are considering listing your home. We look forward to a no obligation sit down to discuss your needs and our services.