Hawaii Real Property Tax Act (HARPTA)

HARPTA withholding rate increased almost 50% last year meaning planning for HARPTA avoidance and recovery becomes even more important for non-Hawaii residents.

HARPTA withholding rate increased almost 50% last year meaning planning for HARPTA avoidance and recovery becomes even more important for non-Hawaii residents.

HARPTA is a Hawaii state tax collection vehicle which requires the withholding of 7.25% of the sales price from a real estate transaction when the seller is not a resident of Hawaii.

On the theory that the selling party (who is a non-resident) might neglect or avoid filing a state income tax return to report the appropriate amount of capital gain on the transaction, Hawaii withholds 7.25% of the adjusted sales price of all real estate transactions if the selling party is a non-Hawaii resident.

Almost 1/3 of real estate (by value) in Hawaii is owned by non-residents. These include US citizens living on the mainland and all other non-US persons.

In September of 2018 the rate of withholding was increased from 5.00% to 7.25% causing additional sticker-shock at closing transactions around the islands. This withholding would total $72,500 on a million dollar sales price. Withholding for taxes that might not even be due. In the vast majority of transactions, withholding at 7.25% is much more than any tax due.

Planning ahead when you decide to sell your real estate can save you precious cash flow by minimizing or eliminating the amount of HARPTA that will be withheld from your proceeds at the closing table. There are exemption applications which may eliminate or reduce the amount of HARPTA withholding. These exemptions require timely filing and must occur well in advance of the closing date.

If you have closed a transaction and had the full 7.25% withheld from your proceeds you may be wondering how to recover your money. If you don’t owe any tax on the transaction or have any other unpaid income or excise taxes - you can recover the full amount withheld usually within 60 days.

Before refunding any HARPTA withholding, the HI Dept of Taxation will determine if you are compliant and up to date on various Hawaii taxes to which you are subject.

Hawaii Taxes you Might Owe

  • Hawaii state income tax returns are due each year you rent property on Hawaii. This is true whether or not your rental creates taxable income or not. There can be significant differences between federal and Hawaii depreciation allowances and it is possible that you owe Hawaii state income tax on the rental even if you did not show a profit on your federal return.

  • Hawaii General Excise Tax (GET) of 4.00-4.50% is due on all long term rental of over 180 days. GET and Transient Accommodation Tax (TAT) of 10.25-10.50% is due on all short term rentals of under 180 days.

  • You are subject to Hawaii capital gains tax of up to 7.25% on the profit (gain) realized on the transaction

Once current on all of applicable taxes above, you are eligible to file for an early refund of all or a portion of the HARPTA withholding. You must prepare an estimate of any tax you may owe Hawaii. If your estimate is zero, you may be able to recover the entire amount prior to filing your next HI state income tax return.

Need Help with HARPTA Refunds and Recoveries?

The HARPTA withholding and refunding process is not rocket science but it’s usually a good idea to get some local help. Instructions for completing the applicable form(s) to obtain refunds can cause confusion. andhese. These refund applications are all subject to manual review with the state biased towards rejection for errors or perceived errors. Review the relevant forms and decide if you feel comfortable in pursuing the process on your own.

If you need assistance with HARPTA withholding recoveries on Form 288C or filing pre-transaction exemptions on Form N-289 I can help. Call or email today to discuss how I can help.