Hawaii Real Property Tax Act

When engaging in real estate transactions in Hawaii, it is essential to be aware of the Hawaii Real Property Tax Act, commonly referred to as HARPTA. This legislation imposes certain tax obligations on sellers of Hawaiian real estate, particularly non-residents. Complying with HARPTA is a critical aspect of real estate transactions in Hawaii and understanding the intricacies of this act is necessary for avoiding unnecessary penalties and ensuring a smooth process.

HARPTA, or the Hawaii Real Property Tax Act, is a law that requires the withholding of a portion of the sale price from the proceeds of a property sale by non-residents in Hawaii. The act was implemented to ensure that the state of Hawaii collects taxes owed by non-residents who sell real estate in the state. HARPTA is regulated by Hawaii Revised Statutes (HRS) Section 235-68.

The law mandates that when real estate property in Hawaii is sold by a non-resident, the buyer is required to withhold 7.25% of the gross sales price. This withholding serves as a prepayment of the seller’s potential state income tax liability on the gain realized from the sale.

Obligations

HARPTA specifically targets non-resident sellers of Hawaiian real estate. A non-resident is defined as an individual or entity that does not reside or operate primarily within the state of Hawaii. This includes:

• Non-resident individuals: Individuals who do not live in Hawaii or do not have Hawaii as their principal place of residence.
  
• Non-resident corporations: Corporations that are not registered or headquartered in Hawaii.
  
• Foreign entities: Any foreign partnership, corporation or trust involved in the sale of Hawaiian real estate.

However, there are certain exceptions. If a seller can prove they are a resident of Hawaii, HARPTA withholding is not required. Additionally, exemptions may apply in cases where the sale results in a loss or the sale price is below a certain threshold.

The HARPTA Process: Step by Step

The HARPTA process involves several steps that must be carefully followed to ensure compliance and avoid unnecessary delays or penalties. The process can be outlined as follows:

1. Determination of Residency Status: Before the sale, the residency status of the seller must be determined. This involves gathering relevant documentation to establish whether the seller qualifies as a resident or non-resident.
   
2. Withholding Requirement: If the seller is determined to be a non-resident, the buyer is required to withhold 7.25% of the gross sales price. This amount is then submitted to the Hawaii Department of Taxation. It is important to note that the withholding is based on the gross sales price, not the net gain.
   
3. Submission of Withholding: The withheld amount must be submitted to the Hawaii Department of Taxation within 20 days of the closing date of the sale. The buyer is responsible for ensuring that this payment is made on time. Failure to do so could result in penalties and interest charges.
   
4. Filing a Tax Return: The non-resident seller is required to file a Hawaii state income tax return to report the sale and calculate the actual tax liability. The 7.25% withholding acts as a prepayment and the seller may either owe additional taxes or be entitled to a refund, depending on the circumstances.
   
5. Requesting a Refund or Credit: If the actual tax liability is less than the amount withheld, the seller may request a refund or apply the excess amount as a credit towards other Hawaii state tax obligations. This request can be made by filing a tax return and the appropriate forms with the Hawaii Department of Taxation.
   
6. Certificate of Compliance: In some cases, a seller may apply for a Certificate of Compliance (Form N-288C) from the Hawaii Department of Taxation to reduce or eliminate the withholding if it can be demonstrated that no tax is owed or the withholding amount is too high. This application should be submitted well before the sale is finalized.

Key Takeaways

HARPTA compliance is a significant aspect of selling real estate in Hawaii, particularly for non-resident sellers. Some key takeaways include:

• Mandatory Withholding: Non-resident sellers should anticipate the mandatory withholding of 7.25% of the gross sales price. This amount serves as a prepayment for potential tax liabilities.
  
• Timely Submission: It is critical that the withheld amount is submitted to the Hawaii Department of Taxation within 20 days of the sale closing. Failure to meet this deadline can result in penalties.
  
• Tax Return Requirement: A Hawaii state income tax return must be filed by the seller to report the sale and reconcile the actual tax liability.
  
• Refunds and Credits: If the withholding exceeds the actual tax liability, a refund or credit can be requested.
  
• Certificate of Compliance: Obtaining a Certificate of Compliance can be advantageous in reducing or eliminating the withholding obligation.

Our Services 

Complying with HARPTA and aligning with the provisions can be challenging, especially for non-residents unfamiliar with Hawaii’s tax laws. The following services are available to assist clients in meeting their HARPTA obligations:

• Residency Status Determination: Assistance in determining whether a seller qualifies as a resident or non-resident under HARPTA regulations.
  
• Withholding Calculation: Accurate calculation of the required withholding amount to ensure compliance with HARPTA.
  
• Form Preparation and Filing: Preparation and filing of necessary forms, including the submission of withheld amounts to the Hawaii Department of Taxation.
  
• Tax Return Filing: Assistance with filing the Hawaii state income tax return to report the sale and calculate the actual tax liability.
  
• Refund and Credit Requests: Support in requesting refunds or applying for credits if the withholding exceeds the actual tax liability.
  
• Certificate of Compliance Application: Guidance in applying for a Certificate of Compliance to reduce or eliminate withholding obligations.
  
• Consultation and Advisory: Providing expert advice and consultation on HARPTA and related tax obligations, ensuring clients are well informed and prepared for the process.

Conclusion

HARPTA is a crucial aspect of real estate transactions in Hawaii for non-resident sellers. Complying with the requirements, aligning with the withholding obligations and properly filing the necessary tax returns are essential steps in the process. By engaging with a knowledgeable tax professional, sellers would ensure they meet all HARPTA requirements efficiently and avoid potential pitfalls. 

Our firm is dedicated to providing comprehensive support to clients navigating HARPTA, offering services that cover every aspect of the process from residency determination to filing for refunds or credits. Ensuring compliance with HARPTA not only prevents penalties but also contributes to a smoother and more secure real estate transaction experience.