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:
- 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.
- Who HARPTA Affects: It primarily impacts non-resident property sellers, including individuals, corporations, and trusts not based in Hawaii.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
