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Non-Resident Sellers Incur Extra Withholdings in Hawaii

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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Photo courtesy Serge Betasius Photography/freedigitalphotos.net

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!

About the Author

Denise Nakanishi

Denise Nakanishi is a REALTOR Broker with Hawai'i Life. Denise Nakanishi is one of Hilo's most acclaimed real estate agents. She reached the rank of Major in the US Army and is now known by many as "Major Mom." The nickname fits–not only does Denise bring the discipline and mission-oriented attitude you'd expect, she's also caring and compassionate, always looking out for her clients like they're her own family. Having made the Big Island her home since 1987, Denise combines her extensive knowledge of the area with a sharp focus on customer service and the results speak for themselves. She's the recent recipient of the Best East Hawai`i, Best of Zillow, Chairman's Circle Award, President's Circle, Top Producing Agent since 2001, and Realtor of the Year awards. Denise stays ahead of the curve because she's passionate about education–she served as Education Chair for Hawaii Island REALTORS® for many years. She's one of Big Island's best real estate resources, known for her weekly article in the Hawaii Tribune Herald. Denise leads Team Nakanishi for Hawai`i Life, who is committed to their family, work, and community. In her little time away from work, Denise is a committed runner and Grandy. She also devotes many hours to various Veterans' Organizations, the East Hawaii Cultural Center, and the Hawaii Island REALTORS®. You can email me at denise@hawaiilife.com or via phone at (808) 936-5100.

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