FIRPTA & HARPTA in Hawaii’s Real Estate

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Video Transcription
Aloha. George Krischke with Honolulu HI 5 (company now called Hawaii Living).

Today, we’re going to talk about HARPTA and FIRPTA. Now there was a time when foreign investors bought Hawaii properties, and they held them for some time, and eventually sold them with substantial gains without ever paying any required capital gains taxes. They never filed any tax returns. They just took the money and ran. To protect the state and the federal government from the loss of capital gains tax revenue, HARPTA and FIRPTA laws were established.

Anybody coming from anywhere in the world can buy Hawaii real estate. It doesn’t matter where they live, where they come from, what country, what State, wherever from. There are no restrictions, but when it comes to selling, HARPTA and FIRPTA does apply, and sellers that don’t live in Hawaii need to be aware of what it means when they sell their property. So let’s take a look. Let’s start with HARPTA.

1.) HARPTA is an acronym for “Hawaii Real Property Tax Act”. This is a Hawaii State law that requires a withholding of 7.25% of the sales price. (UPDATED! increased from 5% as of 2018) 7.25% of the sales price, not 7.25% of the gains realized. This is 7.25% of the sales price from the seller when the seller is an out-of-State resident. When the seller is not a resident of Hawaii. When the seller is an out-of-State resident. Now, there are some definitions on who is a Hawaii resident and who is a non-Hawaii resident, or an out-of-State resident, I should say. We can take a look at that at another time. Sellers may recoup some of the withholdings beyond the applicable capital gains tax by filing the appropriate form.

2.) FIRPTA, which is an acronym for “Foreign Investment in Real Property Tax Act”. That’s a federal law that requires a withholding of now 15% (UPDATED! increased from 10% as of 2/16/2016) of the sales price. Not 15% of the gains realized, but 15% of the sales price from the seller when the seller is an out-of-the-country resident. Now, you understand, if the seller is an out-of-the-country resident, and he’s not only out of the country, he’s also out of the state, so for somebody out of the country HARPTA and FIRPTA applies. So that’s 7.25% HARPTA withholdings plus 15% FIRPTA withholdings of the sales price.

Sellers may recoup some of the withholdings beyond the applicable capital gains tax by filing the appropriate form.

• Update 2/16/2016: If buyer intends to occupy the property as their principal residence, the required FIRPTA withholding is reduced as follows:
  a.) 10% of the sales price for properties sold between $300,001 to $1Mill.
  b.) 0% of sales price for properties sold up to $300,000. 

So HARPTA and FIRPTA is basically a mechanism to withhold, and then you can file the forms which allows you to calculate what really the appropriate capital gains tax should be, and then you can get a refund of the balance that has been withheld beyond what is due in capital gains taxes. That’s HARPTA and FIRPTA. Now, one more thing about this..

— Sellers need to know that the sale of an investment property may also raise questions by the Department of Taxation regarding rental income received. The state of Hawaii requires anybody that receives rental income to pay the appropriate GET, that’s the General Excise Tax.

And if it’s short-term rental income, less than one hundred eighty days per tenant, then there would also be applicable TAT due. TAT is the Transient Accommodation Tax.

–If you sell your property with HARPTA and FIRPTA withholdings, the tax department may also look into the records if you have paid the appropriate General Excise Tax and possibly Transient Accommodation Tax.

Consider eliminating HARPTA and FIRPTA withholdings by structuring a proper 1031 tax deferred exchange.

Check with your agent, and discuss it with your agent. With all tax matters, always check with your favorite qualified tax professional.

That’s it for today, thanks and Aloha.