Maui real estate stands out as one of the most robust and promising long-term equity growth markets in the world. Its allure extends far and wide, attracting investors from various corners of the country and around the globe. In fact, non-residents own about 25% of Hawaii’s real estate, a fact that poses challenges for both the state and federal government when it comes to tax collection.
The process of buying and selling real estate in Hawaii involves the payment of several state and federal taxes. If the seller has been earning rental income, they are subject to the General Excise Tax. In cases where short-term rental income has been generated, meaning tenants have occupied the property for 180 days or less, then the Transient Accommodation Tax applies. Furthermore, whenever investment properties are sold, taxes on any capital gains realized from the sale must be paid.
As the popularity of property investment among non-Hawaii residents soared, the state encountered challenges in collecting the appropriate capital gains taxes from these sellers. In response, the state government introduced the Hawaii Real Property Tax Act (HARPTA) back in the 1990s to address this issue.
So what is the HARPTA withholding? According to the current regulations of HARPTA, a withholding of 7.25% of the sales price must be collected when non-Hawaii residents sell real estate anywhere in the state. Escrow will withhold this amount and you will see it reflected on your closing statement. In a significant number of instances, the withholding of 7.25% is often higher than the actual tax liability.
If there is no tax liability, and all other taxes (such as GET and TAT) have been duly paid, there is an opportunity to obtain a refund for the withholding, either partially or in its entirety. This can be achieved by submitting the N-288C form or by including it in the income tax filing process. For more details and access to the relevant forms, kindly visit the Hawaii Department of Taxation
If you are a foreign national who has made real estate investments in the US, then you are familiar with the Foreign Investment in Real Property Tax Act (FIRPTA). Enacted in 1980, FIRPTA serves the purpose of enabling the federal government to collect the appropriate capital gains taxes from non-U.S. property owners resulting from real estate transactions.
Similar to HARPTA, FIRPTA mandates the withholding of funds to ensure the collection of applicable taxes. Presently, FIRPTA requires a withholding rate of 15% on the amount realized from real estate sales transactions. It is worth noting that HARPTA was closely modeled after FIRPTA. Therefore, if you are a non-U.S. resident selling an investment property in Hawaii, both HARPTA and FIRPTA withholdings are applicable.
If you are engaged in a 1031 tax deferred exchange, it is important to note that HARPTA and FIRPTA withholdings do not apply. To ensure accuracy and to understand the proper execution of this process, it is advisable to consult a Qualified 1031 Intermediary or a Tax Advisor. They will provide confirmation and offer detailed guidance.
Please be aware that the information provided above is solely for informational purposes and should not be considered as legal, financial, or tax advice. To obtain such advice, it is recommended to seek assistance from licensed and reputable professionals in the respective fields.
If you’d like more information or would like recommendations for qualified experts, please reach out to the Sayles Team. We specialize in assisting and advocating for our clients who are involved in out-of-state and foreign real estate transactions, and we are well-equipped to provide our valued clients with the necessary support.
Anthony Sayles R(S)