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Selling Your Hawaiian Paradise? Understanding HARPTA in 2024

Hawaii’s fascination, glamour, and charm are a key sequel to its stunning beaches and vibrant culture. It’s beyond the imagination for many individuals, some lucky to get their piece of paradise through real estate. However, if you are a non-resident and selling your Hawaiian property, you must understand that there is a tax hurdle called HARPTA.

HARPTA Explained: Withholding Tax for Non-Residents

HARPTA called the Hawaii Real Property Tax Act, is a state law that makes it necessary for the buyers of Hawaii real estate to withhold a portion of the sale proceeds from non-resident sellers. Such withholding payment will be treated as advanced payment of capital gains tax that the seller might owe.

The Withholding Percentage and How it Work:

According to the tax law of 2024, the withholding rate of HARPTA is 7.25% of the sale price. This indicates that such a percentage will be withheld from the closing proceeds in the event that you sell your Hawaii property to the buyer. For example, if your condo is sold for $1 million, the buyer will withhold $72,500.

Who is Considered a Non-Resident Under HARPTA?

The rule of HARPTA applies to individuals or sellers who are not considered residents for tax purposes. This includes those who have not established any domicile, such as a permanent home in Hawaii, and have not spent reasonable time physically in the state.

Is the Withheld Amount Always Your Tax Liability?

Here comes the good news, which states that the withheld amount might be more than what you could owe in capital gains tax. Let’s discuss why that is the case.

  • Capital Gains Tax Rate:

The current federal capital gains tax rate for many taxpayers is 15% for long-term capital gains where an individual held an asset for more than one year and 20% in addition to 3.8% net investment income tax for short-term capital gains where the asset is held for one year or less. 

There is a probability that such rates might be lower than the 7.25% withheld under HARPTA.

  • Basis:

The basis of the property is the original cost of the property plus any refurbishment or improvement you have made. If the selling price is less than the basis, there would not be any capital gain tax.

  • State Taxes:

It is to be remembered that Hawaii does not have a separate capital gains tax, so therefore there would be no capital gains tax due on the sale.

  • Getting Your Money Back: HARPTA Refunds

In case your withheld amount is greater than the actual capital gains tax, you can file for a refund but there are two ways to do this:

  • Non-Resident Income Tax Return:

This allows you to file a Hawaii non-resident income tax return under form N-15 with the Hawaii Department of Taxation and claim any excess withholding as a refund.

Application for Tentative Refund (Form N-288C):

This option is potentially faster because an individual can file Form N-288C for a tentative refund before filing their complete tax return.

Conclusion:

In a nutshell, individuals must have a detailed understanding of updated tax laws when selling HARPTA properties. The above excerpt is quite descriptive and sufficient to provide adequate knowledge to sellers and mitigate the potential post-tax return dilemmas. 

Moreover, detailed assistance is necessary from a tax expert like Dimovtax.com to deal with tax ambiguities and penalties while considering selling HARPTA properties.

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Call us today at (833) 829-1120, email us at info@dimovtax.com, or fill out the form and we’ll get in touch immediately.

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