What is HARPTA, the new law, and are there any exemptions?
What is HARPTA?
HARPTA is the Hawaii Real Property Tax Act. HARPTA is a Withholding Tax on Sales of Hawaii Real Property by Nonresident Persons. The " withholding obligation is generally imposed on the transferee/buyer when a Hawaii real property interest is acquired from a nonresident person. This withholding serves to collect Hawaii income tax that may be owed by the nonresident person."* This is similar to the withholding in California, often referred to as CalFIRPTA, and the federal withholding tax on the disposition of real property known as FIRPTA (Foreign Investment in Real Property Tax Act)." Read More in Tax Information Release No. 2017-01
Per the State of Hawaii's Department of Taxation: "Hawaii residents and nonresidents alike must pay Hawaii income tax on capital gains recognized on the sale of real property located in Hawaii unless the gain can be excluded under Hawaii income tax law. Many nonresidents never realized that they were subject to Hawaii taxation and did not file a Hawaii income tax return or pay the tax due when they sold a Hawaii property. HARPTA legislation requires a purchaser to withhold a percentage of the sales price when acquiring Hawaii real property from a nonresident seller and remit the amount withheld directly to the State." Read More detailed information about HARPTA in a Message from the Hawaii Department of Taxation*
Section §235-68, Hawaii Revised Statutes (HRS), provides for the withholding of tax on the disposition of Hawaii real property by nonresident persons and is commonly referred to as "HARPTA." Section §235-68, HRS, requires every transferee/buyer1 to withhold and pay to the Department of Taxation (Department) 5 percent of the amount realized on the disposition of Hawaii real property, unless the disposition is exempt from withholding."
Hawaii is an escrow state, and while escrow is not responsible to withhold the required amount, per the Purchase Contract, escrow is instructed to collect and disburse the funds to the State Department of Taxation.
The New Law: Hawaii Revised Statutes §235-68
A new law has been passed that increases the amount of the HARPTA withholding from 5% to 7.25 %. This applies to transactions for sale of real property that close on or after September 15, 2018.
Are there any HARPTA Exemptions?
In addition to participating in an IRC 1031-Tax Deferred Exchange, a Seller may currently apply for an Exemption from the HARPTA Withholding if they meet certain exceptions:
1) the seller is a Hawaii resident
2) the gain on the sale of the property is not recognized (i.e., not taxable) under the federal Internal Revenue Code as adopted by Hawaii
3) the property was the principal residence of the seller in the year preceding the sale and the amount realized from the sale of that property is not more than $300,000.
Required forms for filing a tax return or an exemption can be found on the Department of Taxation website. It is always helpful to retain your closing statement on file, along with your title insurance policy, and/or fully executed purchase contract.
If the property was inherited, the estate tax return and any supporting documents may also be required. It is noteworthy that the annual real property tax assessment notice does not substantiate a seller’s basis in the sale of the property.
The Seller must file a return for the year of the sale. Any overpayment would be refunded after the return is processed.
*The sources used in this post were downloaded from the Hawaii Department of Taxation was downloaded from the State of Hawaii Tax Department's website on the date of this post, July 10, 2018. Newer information may be available and any interested party should check the Department of Taxation website.
This blog is for informational purposes only and is not intended to serve as legal, business, or tax advice. Please consult with the appropriate legal, accounting, or qualified 1031-exchange professional before making any decisions in this matter.
The document Message from Hawaii Department of Taxation has not yet been updated to reflect the 7.25% amount per the Hawaii Revised Statutes §235-68. The document Tax Information Release No. 2017-01 is dated June 28, 2017.
Courtney M. Brown, R(S)
Island Sotheby's International Realty