In Hawaii, non-resident sellers of real property are subject to a withholding, referred to as HARPTA (Hawaii Real Property Tax Act) which amounts to 7.25% of the gross sales price of the home. Please note that the withholding is on the gross sales price, and not on the net proceeds from the sale.
Military homeowners that sell their primary residence prior to a PCS move, would be exempt from HAPRTA, even if they have not declared Hawaii as their state of legal residency.
Rent vs. Sell
If you decide to rent your home instead of selling when you PCS, it is important to understand how HARPTA may affect you when you sell.
When you realize a profit on the sale of your home, the IRS allows for an Exclusion of Gain ($250,000 or $500,000 if married filing jointly), for homeowners that meet the following Eligibility Test:
- You owned the home for 2 of the last 5 years
- You lived in the home as your primary residence for 2 of the last 5 years
- You have not sold another home in the 2-year period preceding the date of sale.
There is a special rule for active duty service members, allowing you to suspend the 5-year period for ownership and residence, as long as your PCS orders take you more than 50 miles away from the home. This is an easy hurdle to jump when stationed on Oahu!
As long as you remain on active duty, you may “stop the clock” for up to 10 years, for a total look-back period of 15 years. Please note that this suspension cannot be used on more than one property at a time.
Time Is Of The Essence
It is important to keep this timeframe in the forefront, as letting it pass can have a profound effect on your tax liability when you sell.
If you were to hold your investment property past the 2 out of 5-year rule, or the extended suspension period of 2 out of 15 years, then you would lose the Exclusion of Gain and would incur the HARPTA withholding.
Determining if you are eligible for a HAPRTA waiver is something that should be explored at the time you decide to sell your home. Rely on your CPA for this determination, as it is important that you provide accurate information on the documentation.
If you are eligible, be sure to submit a completed Form N-289, as it can take up to two months to receive your waiver. If the waiver is not received prior to closing on your property, the withholding would likely have to be paid upfront and reimbursed after the fact.
1031 Exchange Option
If you choose to keep your property past the Exclusion of Gain time period, consider asking your CPA about using the proceeds from the sale of your investment property to purchase another like-kind property, as this could avoid capital gains taxes.
If you would like to speak with a CPA that is well versed in HARPTA and can assist in filing a waiver, give me a call, I know a guy! And if you decide that selling before you PCS is your desired route, give me a call, I’d be happy to help!