What is Harpta?

HARPTA stands for the Hawaii Real Property Tax Act. It is a state law in Hawaii that requires a tax withholding of 7.25% of the gross sales price on the sale of Hawaii real estate by nonresident sellers. This withholding is intended to ensure that nonresident sellers pay their capital gains taxes on the sale of property within the state. 

Where is the line between resident and nonresident?

Let me point you to Form N-289, which is a form that every seller receives when they go into escrow. Take a look at the first box, The box allows for a seller to claim Hawaii residency, thus allowing them to avoid HARPTA withholding. Please note that this strategy may help to avoid a withholding, but it does not allow you  to avoid any tax on the gain that may occur upon sale. The Form N-289 references 235-1 HRS tax code which defines a resident as:

(1) Individual domiciled in the State; and 

(2) Other individual, whether domiciled in the State or not, who resides in the State. To “reside” in the State means to be in the State for other than a temporary or transitory purpose. Every individual who is in the State more than two hundred days of the taxable year in the aggregate shall be presumed to be a resident of the State. This presumption may be overcome by evidence satisfactory to the department of taxation that the individual maintains a permanent place of abode outside of the State and is in the State for a temporary or transitory purpose. No person shall be deemed to have gained or lost a residence simply because of the person’s presence or absence in compliance with military or naval orders of the United States, or while engaged in aviation or navigation, or while a student at any institution of learning.

If I create an LLC or register an LLC in HI, can I avoid HARPTA withholdings? 

It is possibly for your LLC can be classified as a Hawaii resident entity (by having its principal place of business in Hawaii, for example), it could potentially avoid the withholding. However, this would typically involve more than just forming an LLC in Hawaii and primarily living on the mainland; it would require the LLC to have substantial business activity or presence in the state otherwise your LLC will need to be your primary residence. 

How can I be exempt for HARPTA withholdings?

  • Primary Residence: HI residents are exempt from HARPTA withholdings.

  • 1031 Exchange: If you’re engaging in a 1031 exchange, where you’re swapping one investment property for another, you might defer capital gains tax and thus, the HARPTA withholding. However, this requires careful planning and compliance with IRS rules. (See my vendors page for recommendations). 

  • Transfer Between Spouses: If the property is transferred between spouses in a divorce or under a property settlement, it might be exempt.

    1. Involuntary Conversions: Sales due to condemnation or threat of condemnation might be exempt.

  • Installment Sales: If you structure the sale as an installment sale, you might defer part of the withholding to future years when payments are received, potentially reducing the immediate financial impact.

For more help with HARPTA, speak to the specialists:

Brad Konishi, CPA

info@harpta.com

https://www.harpta.com/

1950 Young St. Suite 480 Honolulu, HI 96826

(808) 737-4412

OFFICE HOURS:

Monday to Friday 9AM-4PM

“He helped us navigate the HARPTA tax. Because of his help we saved close to 60K on that. He also went above and beyond with his help finding and scheduling contractors”
— Kelly M Closed Feb '24 for $800,000

*Above is a real review from past client after speaking to his local attorney. His mainland attorney advised him not to contest the HARPTA withholdings. I kept pushing the Seller to call Brad at Harpta.

What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is a U.S. federal tax law that requires a withholding of up to 15% of the gross sales price when U.S. real estate is sold by a foreign person (including non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, or foreign estates). This withholding acts as a prepayment of the potential capital gains tax the seller might owe, ensuring that the U.S. government secures the tax revenue from foreign sellers.

Applicability:

  • U.S. Real Property Interests: This includes land, improvements, associated personal property, and certain interests in corporations, partnerships, and trusts if more than 50% of their assets are U.S. real property interests.

  • Sellers: Only applies to foreign sellers. If the seller is a U.S. person, FIRPTA withholding does not apply.

  • Exemptions and Reductions:

    • The IRS allows for exemptions or reduced withholding if certain conditions are met, like if the property is sold for $300,000 or less and the buyer intends to use it as a personal residence, or if the seller obtains a withholding certificate from the IRS adjusting or exempting the withholding.

  • Filing Requirements: After the sale, the buyer must file Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests) and Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests) with the IRS.

  • Seller’s Tax Liability: The withheld amount might not fully cover the seller’s tax liability. The seller needs to file a U.S. income tax return (Form 1040NR for individuals or Form 1120-F for corporations) to report the sale and possibly claim any excess withholding as a refund.

FIRPTA can complicate real estate transactions, so it’s often advisable for both buyers and sellers to consult with tax professionals to ensure compliance and to handle the paperwork correctly.