Disclaimer-The information in this blog was collected from and copied from the HARPTA.TAX web page directly. Mark Lee CPA did give me permission to copy and share.
I found this information to be extremely beneficial and thought my clients who are buying and selling properties on Kauai would find it equally as helpful.
Jill Caisey RS-79794 Realtor with Hawaii Life Real Estate Brokers Kauai
HARPTA IS A HAWAII STATE TAX LAW WHICH REQUIRES WITHHOLDING 7.25% FROM THE PROCEEDS OF CERTAIN REAL ESTATE TRANSACTIONS IF THE SELLER IS NOT A RESIDENT OF HAWAII.
The HARPTA withholding is is collected to insure non-Hawaii resident sellers of real estate pay any state taxes connected to the transaction. This rate of withholding very large in comparison to what most sellers will ultimately owe in tax. If you plan ahead, you can minimize or eliminate the amount of withholding from your Hawaii real estate sales transaction.
Almost 1/3 of real estate (by value) in Hawaii is owned by non-residents. These include US citizens living on the mainland and all other non-US persons.
When you decide to sell your real estate can save you precious cash flow by minimizing or eliminating the amount of HARPTA that will be withheld from your proceeds at the closing table. There are exemption applications which may be filed prior to closing which will enable the closing agent to reduce or eliminate HARPTA withholding. These exemptions require timely filing and must occur well in advance of the closing date.
The HARPTA withholding rate increased from 5% to 7.25% in 2018. HARPTA withholding is partially to fully refundable.
If you have closed a transaction and had the full 7.25% withheld from your proceeds you may be wondering how to recover your money. If you don’t owe any tax on the transaction or have any other unpaid income or excise taxes – you can recover the full amount withheld.
Hawaii Taxes you Might Owe:
Hawaii state income tax returns are due each year you rent property on Hawaii. This is true whether or not your rental creates taxable income or not. There can be significant differences between federal and Hawaii depreciation allowances and it is possible that you owe Hawaii state income tax on the rental even if you did not show a profit on your federal return.
Hawaii General Excise Tax (GET) of 4.00-4.50% is due on all long term rental of over 30 days. GET and Transient Accommodation Tax (TAT) of 10.25-10.50% is due on all short term rentals of under 30 days.
You are subject to Hawaii capital gains tax of up to 7.25% on the profit (gain) realized on the transaction.
Once you are current on all of the taxes above, you are eligible to file for an early refund of the withheld tax based on an estimate of the tax you may owe. If your estimate is zero, you may be able to recover the entire amount prior to filing your next HI state income tax returns. NOTE: Any unfiled GET/TAT/Income tax returns must be filed prior to receiving a HARPTA refund.
Need Help with HARPTA Refunds and Recoveries and Back Tax Returns in Hawaii?
The HARPTA withholding and refunding process can be confusing; their are up to five separate tax forms which may be involved in your individual withholding and refund transactions. Review the relevant forms here and you may decide you feel comfortable in pursuing the refund process on your own.
HARPTA FREQUENTLY ASKED QUESTIONS
WHAT IS HARPTA?
HARPTA is an acronym for the Hawaii Real Property Tax Law. HARPTA is a law, not a tax, a common misunderstanding. The Hawaii law is similar to laws passed by other states (e.g., California) as well as a federal law that applies to non-U.S. citizens. Under HARPTA, an estimate of an owner’s capital gains tax that will be due Hawaii is withheld at closing. Prior to the passage of HARPTA, the state had no means of collecting such taxes unless the absentee owner filed a Hawaii income tax return for the year of the sale. NOTE: Some absentee owners may be exempt from the HARPTA law. However, the fact that an owner may be exempt from the HARPTA law does not also exempt the owner from paying state capital gains taxes that may be due Hawaii.
HOW MUCH IS COLLECTED UNDER THE HARPTA LAW?
The amount collected under the HARPTA law is 7.25% of the sales price.
HOW MUCH IS OWED IN HAWAII CAPITAL GAINS TAX?
The Hawaii capital gains tax on real estate is 7.25%. This applies to all four factors of gain, refer below for a discussion of the four factors. The difference between how much is withheld and how much is owed is the amount of your refund. The state of Hawaii will keep your money if you do not submit the appropriate refund requests.
IF THE COLLECTED AMOUNT IS TOO LARGE, HOW DO YOU OBTAIN A REFUND?
If the 7.25% of sales price withholding is too large, the owner files a Hawaii form N-288C after closing. If the appropriate Hawaii income tax return (ex: form N-15) for the year is available, then the owner should file the appropriate tax return instead of filing form N-288C. The state will reject form N-288C if form N-15 is available. Hawaii has no provision for filing a form prior to closing so the correct amount will be withheld.
WHAT IF THERE ARE INSUFFICIENT PROCEEDS FROM THE SALE TO PAY THE WITHHOLDING OR IF THERE IS A LOSS ON THE SALE RATHER THAN A GAIN?
The withholding may not be required if there are insufficient proceeds from the sale or if there has been a capital loss rather than a capital gain. When either of these occurs, escrow will not close the transaction until a Hawaii form N-288B has been approved by the state (unless the seller agrees to pay the withholding). If the sale creates a capital loss or the proceeds available are insufficient, the owner must submit appropriate paperwork to the state. This paperwork must include (as applicable): (a) a copy of the closing statement when the property was purchased; (b) documentation showing depreciation that has been claimed; (c) documentation for any capital improvements; (d) documentation for deferred gain from any prior sale(s) that adjusted the owner’s buying basis; and (e), an estimated closing statement prepared by escrow. NOTE: To allow time for approval, form N-288B must be submitted to the state at least ten business days prior to closing. Since an estimated closing statement prepared by escrow has to accompany form N-288B, it is usually submitted relatively late during the escrow process. If form N-288B is rejected by the state, there is usually insufficient time to submit a revised form and still meet the scheduled closing date. NOTE: Most absentee owners should have a CPA or professional tax advisor prepare their N288B form to document a capital loss. It is relatively common for the state to reject applications because of insufficient documentation. We have had absentee owners agree to pay the withholding when there was no gain merely to be able to close their transactions as scheduled. The owners were reimbursed after the sale: however, they could have avoided any withholding had they submitted a better package. NOTE: The state may adjust the withholding to a lesser amount if there is a gain but insufficient proceeds available to pay 7.25% of the sales price. NOTE: Form N-288B has a section where the owner indicates if the property has been a rental and if so, the owner’s Hawaii General Excise Tax (GET) number for the property. If you have not been paying Hawaii GET on your rental receipts, you may have to pay past GET plus a penalty/interest in order to have form N-288B be approved.
IS HAWAII TAX LAW FOR THE SALE OF A PERSONAL RESIDENCE SIMILAR TO THE FEDERAL LAW?
Yes. This federal law allows an owner to exclude up to $250,000 of gain (single) or up to $500,000 of gain (married) providing they have owned and occupied a property for at least two out of the past five years. Lower exclusions may be allowed under certain circumstances if the owner occupancy time frame has been less than two years.
HOW DOES AN OWNER OBTAIN THE HARPTA FORMS?
The forms can be obtained from the state. Select “Forms” from Hawaii.gov/tax and go to the “Alphabetical List”. Select “N” and scroll to the applicable form. The forms can be downloaded from the state website here.
WHAT DEFINES A NONRESIDENT?
A nonresident owner for purposes of HARPTA is an owner who does not file a Hawaii resident tax return.
DOES HARPTA APPLY TO MILITARY MEMBERS?
While there is no blanket exemption to HARPTA for military members, most are exempt from HARPTA withholding because of Federal exemptions which Hawaii recognizes. Contact this office for complete details.
ARE THERE ANY EXCEPTIONS TO THE 7.25% OF SALES PRICE WITHHOLDING?
Following are the most common exceptions: a. The seller is a resident of Hawaii and form N-289 has been completed. b. The seller is currently a nonresident of Hawaii and has lived in the property as their primary residence for two of the past five years. The seller must fill out form N-288B and attach form N-103. c. There is no taxable gain on the sale and an approved form N-288B has been received from the state. d. There are insufficient proceeds from the sale to pay the withholding and an approved form N-288B has been received from the state. If some proceeds are available and there has been gain, the state may adjust the withholding to a lesser amount. e. In the year prior to the sale the property was used as a primary residence and the sales price is $300,000 or less and the seller has completed an form N-289. f. The owner conducts an IRC 1031 tax-deferred exchange.
NO TAXABLE GAIN?
No taxable gain applies when there is a loss on the sale rather than a gain. No taxable gain may also involve transfers of property incident to a divorce, as a gift, or as an inheritance.
AN IRC 1031 TAX-DEFERRED EXCHANGE?
Section 1031 of the Internal Revenue Code (IRC) provides for the deferment of capital gains taxes realized on the sale of investment real estate when it is exchanged for other investment real estate. Under IRC section 1031, if you sell investment real estate and buy more expensive investment real estate within a prescribed time frame, you can defer capital gains taxes on the property you are selling.
HOW IS HARPTA ENFORCED?
HARPTA has the buyer responsible for paying the withholding if appropriate documentation is not provided by the seller. Therefore, escrow will automatically withhold 7.25% of the sales price unless the seller can document that no such withholding is required.
*Sourced from HARPTA.TAX website
For more information on Kauai Real Estate please contact: Jill Caisey 808-634-8062 call or text
*Information for this blog post was sourced from HARPTA.TAX website. Written by Mark Lee CPA contact Mark via his webpage at: https://harpta.tax/home