HARPTA and FIRPTA
For prospective Buyers, one of the first questions is "Are there any special taxes for foreign Buyers when purchasing in Hawaii?", although the answer may seem like a simple 'No', it is imperative that Buyers understand that when selling, withholdings will be imposed based non-Hawaii residency (out-of-State owners) and non-US residency (foreign nationals).
HARPTA
In the State of Hawaii, the Hawaii Real Property Tax Act (referred to as HARPTA) is a mechanism that requires the withholding of 7.25% of the amount realized, generally the sales price, when a non-Hawaii resident sells real estate. Keep in mind that this withholding is based on the adjusted sales price, NOT on the profit. As an example, a Seller purchased the property for $500K 5 years ago, sells it for $750K, the withholding will be based on the $750K sales price. Throughout the entire State, about a 1/3 is actually owned by non-Hawaii residents so HARPTA becomes a critical tool to ensure that taxes are collected accordingly - under the presumption that if not enforced, the Seller may avoid filing and paying the capital gains tax.In a large percentage of cases, the 7.25% withheld is actually much higher than the actual amount of the tax liability. If there is no tax liability and all other taxes (GET and TAT, namely) are paid, then it is possible to get a refund of the withholding, either partial or in full, by filing N-288C or otherwise by filing income taxes. Please visit the Hawaii Department of Taxation (click here) for more information and to access applicable forms.
FIRPTA
As one of the strongest long-term equity growth markets in North America, Hawaii real estate presents a strong option for savvy foreign investors looking for not only a picture-perfect property but also a quantifiable investment. It is critical for foreign Buyers to be familiar with the Foreign Investment in Real Property Tax Act (FIRPTA) - click here to view the IRS FIRPTA page. When a property in the US is sold by a foreign person, then a FIRPTA withholding of 15% of the amount realized is required. If a property was owned jointly by both US persons and foreign nationals, then the amount realized is based on capital contribution of each Seller. As with most things, there are applicable exceptions, such as if the Buyer purchases the property as a primary residence and sales price is less than $300K. For a full list of applicable exceptions, visit the IRS website (click here)As a a side note but worth mentioning, in the State of Hawaii, normally the collection and remittance of HARPTA and FIRPTA are the contractual obligation of the Buyer, as per the Standard Purchase Contract used by our team of Hawaii Realtors. In practice, this is a function executed by the Escrow team to ensure compliance.
For those effectively carrying a 1031 Exchange, withholdings are not applicable. Speak to a Qualified Intermediary or Tax Advisor to confirm and details on how to properly execute.
The above is for information purposes only, it is NOT intended as legal, financial or tax advise - for that, please consult licensed and reputable advisors in said sectors.