The Federal government requires a withholding of 10% of the gross proceeds any time a foreign seller conveys property. Escrow will also withhold an additional 5% because the foreigner is not a Hawaii resident. The 5% withholding applies to all out-of-state owners. Buyer and seller alike should be aware of nuances pertaining to the Foreign Investor Real Property Tax Act (FIRPTA) and the Hawaii Investor Real Property Tax Act (HARPTA).
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Buyer Be Aware of Your Liability with Foreign Sellers
As soon as an escrow is opened, an affidavit is forwarded to the seller. This normally comes from the escrow company. A copy of the completed affidavit is provided to the buyer. It’s important that the buyer retain this paperwork. This is because the buyer could be held responsible for any tax related to the sale if seller fails to pay! The buyer is not obligated to investigate any statement on the affidavit. They must simply produce a copy if questioned. Any gain will trigger withholding.
Sellers able to show a loss may apply for a waiver of the withholding. This should be done well in advance. In today’s market, sellers with no gain, or those with a loss, should be a red flag to the REALTORS® involved. A HARPTA exemption request should be received by the State at least 10 days prior to the scheduled closing date. Foreign sellers should allow up to 12 weeks for approval of a withholding exemption from the Federal Government.
Loss and 1039 Exchange are the Exceptions
If withholding is required, sellers with no other state or federal income can file for a refund at the beginning of the next tax year. Most will be able to reclaim much of the withholding. The State of Hawaii extends residency courtesy for one year from the date the resident relocates outside the state. The assumption is that sellers leaving Hawaii will need to file at least one more tax return as residents.
Sellers participating in a 1031 exchange are not subject to HARPTA/FIRPTA withholding because they are deferring their gain. Seller-financed sales may be subject to either incremental withholding or lump sum withholding, depending on whether or not legal title passes. It’s important to consider how the HARPTA/FIRPTA withholding will impact the required down payment on any seller-financed contract.
Do Your Homework Early On
Resident aliens are regarded as residents for the purposes of withholding. So, if a move is in your future, be sure your agent checks seller residency early on. Unfiled exemptions can delay closing which could, in turn, affect the buyer’s loan. Sellers gaining even one penny on a sale should always be aware of how HARPTA/FIRPTA will impact their bottom line! After all, when it comes to real estate sales, surprises are rarely a good thing!