HARPTA Withholding Tax For Non-Resident Sellers Rises Next Month
When a homeowner who is not a legal resident of the state of Hawaii decides to sell their property, the Hawaii Real Property Tax Act (HARPTA) goes into effect to ensure the state collects taxes it may be due if the property owner had not paid enough general excise or transient taxes while they owned the property. Also, HARPTA was enacted to provide a means for the state to collect capital gains taxes from absentee owners.
New Law Raises Amount of Withholding: Hawaiʻi Revised Statutes §235-68
LUVA Real Estate keeps informed about state and local bills and laws that go into effect that have a financial effect on our clients. We wanted to inform you that the law regarding raising the amount of withholding passed in March 2018 and increases the amount of the HARPTA withholding from 5% to 7.25% beginning next month on September 15th, 2018.
HARPTA is the Hawaiʻi Real Property Tax Act and is a withholding “tax” on sales of Hawaiʻi real property by non-resident persons
Background Information on HARPTA
First, what is HARPTA? HARPTA is the Hawaiʻi Real Property Tax Act and is a withholding “tax” on sales of Hawaiʻi real property by non-resident persons. The ” withholding obligation” is generally imposed on the transferee/buyer when a Hawaiʻi real property interest is acquired from a nonresident person. The Hawaii Department of Taxation will want 7.5% of the sale of the property. This withholding serves to collect Hawaiʻi income tax that may be owed by the nonresident person.”* But, to be clear, this is not a tax – it’s a withholding.
It’s like a “deposit” or a “retainer” to make sure you file and pay the required Hawaii income, general excise (GE), and transient accommodations taxes (TAT) , as applicable.
The amount withheld is only a rough estimate. When the selling owner subsequently files a Hawaii tax return, the owner then computes the proper tax liability and can then get a refund of any tax previously paid, but that is not owed. HARPTA is a payment of tax just like wage withholding or estimated tax payments would be.
If you have no gain at all on your Hawaii property sale and you are current on your GE and TAT taxes you might get ALL of the withheld fee (7.5% of the sale of the property) back as a refund. If you DO owe capital gains, general excise, and transient accommodations taxes, then it is possible that you might actually owe MORE tax than the amount withheld.
This is similar to the withholding in California, often referred to as CalFIRPTA, and the federal withholding tax on the disposition of real property known as FIRPTA (Foreign Investment in Real Property Tax Act).”
A transferee/buyer must report and transmit to the Department the tax withheld by the 20th day after the date of transfer.
Are there any HARPTA Exemptions?
In addition to participating in an IRC 1031-Tax Deferred Exchange, a Seller may currently apply for an exemption from the HARPTA Withholding if they meet certain exceptions:
- the seller is a Hawaiʻi resident
- the gain on the sale of the property is not recognized (i.e., not taxable) under the federal Internal Revenue Code as adopted by Hawaiʻi
- the property was the principal residence of the seller in the year preceding the sale and the amount realized from the sale of that property is not more than $300,000.
Required forms for filing a tax return or an exemption can be found on the Department of Taxation website. It is always helpful to retain your closing statement on file, along with your title insurance policy, and/or fully executed purchase contract.
If the property was inherited, the estate tax return and any supporting documents may also be required. It is noteworthy that the annual real property tax assessment notice does not substantiate a seller’s basis in the sale of the property.
The Seller must file a return for the year of the sale. Any over-payment would be refunded after the return is processed.
How do you get your refund of withheld fees from the state?
In cases where you paid all of your GE and TA taxes and your capital gains owed to Hawaii, and the income tax owed to Hawaii on computed capital gains are less than the amount withheld, you can file for a refund of the HARPTA withholding. You do this by filing a non resident Hawaii Income Tax form known as Form N15.
Be prepared to wait, however. If you sell your property in April, the N15 tax form for that year will not be available until January of the following year – just like most income tax returns.
Fortunately, Hawaii also offers form N-288C, which can be completed and filed to get your money back much sooner.
LUVA Real Estate suggests that you contact your accountant to help you find out what your deductions are from the time you owned your property, especially if you had tenants renting out the property.
You can learn more by visiting the State of Hawaii Department of Taxation website.
If you need recommendations of local accountants and tax professionals, we can help you. Just call our office and we would be glad to provide you with assistance!