HARPTA and FIRPTA: What Non-Resident Sellers of Hawaiʻi Property Need to Know

HARPTA and FIRPTA are not additional taxes. They are mandatory withholdings designed to make sure the state and federal governments collect capital gains tax from non-resident sellers.

1. 1

   HARPTA (Hawaiʻi Real Property Tax Act)

   A Hawaiʻi state law requiring tax withholding on the sale of real property by non-resident individuals and entities.

   • The rate: 7.25% of the gross sales price, not the profit.
   • Who is affected: Sellers who are not residents of Hawaiʻi for state tax purposes. This includes U.S. citizens living on the mainland, foreign nationals, and military members who do not claim Hawaiʻi as their legal residence for tax filings.
   • How it works: At closing, the escrow company withholds 7.25% of the total purchase price and remits it directly to the Hawaiʻi Department of Taxation. This serves as an advance deposit against any capital gains tax actually owed.
2. 2

   FIRPTA (Foreign Investment in Real Property Tax Act)

   A federal law requiring tax withholding on the sale of U.S. real property by foreign sellers.

   • The rate: Generally 15% of the gross sales price.
   • Who is affected: Sellers who are not U.S. citizens or U.S. resident aliens, including non-resident foreign corporations and entities.
   • Important note: If you are a foreign seller, both HARPTA (7.25%) and FIRPTA (15%) can apply simultaneously, resulting in a total withholding of up to 22.25% at closing.

Key FIRPTA Exceptions Based on Buyer Residence:

If the buyer intends to occupy the property as a personal residence (for a specified minimum period over the first two years):

• Sales price of $300,000 or less: Withholding can be reduced to 0% with proper buyer certification.
• Sales price over $300,000 up to $1,000,000: Withholding is reduced from 15% down to 10%.

Common Exemptions and Reductions

You may qualify to reduce or eliminate these withholdings under certain circumstances:

• Hawaiʻi residency: If you are a Hawaiʻi resident for tax purposes, you complete Form N-289 (Residency Affidavit) provided by escrow to exempt the sale from HARPTA.
• 1031 Exchange: The transaction is part of a qualifying, tax-deferred exchange under IRC Section 1031.
• Primary residence exemption: Under HARPTA, the sale of your primary residence may qualify for an exemption if specific criteria are met.
• Reduced gain or no gain: If your estimated capital gains tax will be significantly lower than the standard withholding amount (or if selling at a loss), you can submit an application on or before the closing date using Form N-288B (for HARPTA) or IRS Form 8288-B (for FIRPTA) to request a reduced withholding amount or waiver.

How to Get Over-Withheld Funds Back

Because withholdings are calculated on the total sales price rather than net profit, the amount withheld often exceeds the actual tax liability.

• Early refund application: After closing, you can request an early refund of HARPTA funds by filing Form N-288C once the escrow remittance has cleared. For FIRPTA, submitting Form 8288-B on or before closing allows the IRS to process a withholding certificate before final settlement.
• Annual tax returns: You can also claim your refund by filing your year-end tax returns, Hawaiʻi Form N-15 for non-residents and federal Form 1040-NR for foreign individuals. The actual tax liability will be calculated, and any excess funds held will be refunded.

Why This Matters for Big Island Sellers

On Hawaiʻi Island, a significant portion of residential real estate comprises second homes and vacation rentals owned by out-of-state residents. As a result, HARPTA and FIRPTA impact a large number of transactions here. Having 7.25% to 22.25% of the total purchase price withheld directly impacts your net cash proceeds at closing, and reclaiming over-withheld funds from tax agencies can take several months.

Pro Tip: Consult a qualified CPA or tax advisor at least 45 to 60 days prior to closing. Preparing exemption or reduction paperwork early helps ensure your funds are not unnecessarily tied up after escrow closes.

If you are planning to sell a property in Hawaiʻi or purchase from an out-of-state seller, feel free to reach out. I can help flag potential withholding requirements early in the process and connect you with experienced tax professionals.

With aloha,
Carol Porter
REALTOR® · RS-87584 · HI · Better Homes and Gardens Real Estate Island Lifestyle

Disclaimer: This information is provided for general educational purposes only and does not constitute formal legal or tax advice. Always consult a qualified tax professional regarding your specific situation.