Important Note: This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Hawaii property tax rules, conveyance tax rates, and withholding requirements are subject to change and vary based on individual circumstances. Buyers and Sellers should consult a qualified Hawaii real estate attorney, CPA, or tax advisor before making decisions based on any information contained here.
The Withholding Rules Most Nonresident Sellers Do Not See Coming
If you own a property in Kona and do not live in Hawaii, selling it comes with a layer of tax mechanics that mainland Sellers often do not anticipate until they are well into the transaction.
Two withholding regimes apply: HARPTA at the state level and FIRPTA at the federal level. Both are withholding mechanisms, not additional taxes per se, but requirements that a portion of the sale proceeds be held back at closing and remitted to the relevant tax authority pending a final determination of what the Seller actually owes.
For Sellers of high-value properties in the Kona luxury real estate market, the dollar amounts withheld can be substantial. Understanding what these rules require, and what options exist to address them, is an essential part of planning a sale.
HARPTA: The Hawaii State Withholding Rule
HARPTA stands for the Hawaii Real Property Tax Act. It requires that when a nonresident of Hawaii sells real property located in the state, the Buyer must withhold 7.25% of the gross sale price and remit it to the Hawaii Department of Taxation on behalf of the Seller. According to the HARPTA and FIRPTA explainer published by Hawaiʻi Life, the withheld amount is applied against the Seller’s actual Hawaii income tax liability on the gain from the sale.
The withholding is calculated on the gross sales price, not the net proceeds and not the gain. On a $2 million property, that is $145,000 withheld at closing. On a $4 million property, $290,000. If the withholding exceeds the actual tax owed, the Seller can file to recover the difference through a refund, but the process takes time and the cash is not available at closing.
There are mechanisms to reduce or waive the withholding. A Seller who expects their actual tax liability to be less than 7.25% of the gross price can apply for a withholding certificate from the Hawaii Department of Taxation before closing. This requires advance planning and the involvement of a qualified Hawaii tax professional.
FIRPTA: The Federal Layer
FIRPTA, the Foreign Investment in Real Property Tax Act, operates alongside HARPTA but applies to foreign persons (non-US citizens and non-resident aliens) rather than simply nonresidents of Hawaii. If the Seller is a foreign person under FIRPTA’s definition, federal withholding of 15% of the gross sale price is generally required. For a Seller who is both a nonresident of Hawaii and a foreign person, both HARPTA and FIRPTA withholding apply simultaneously. The Hawaiʻi Real Estate Search HARPTA and FIRPTA guide outlines the distinction between state and federal withholding mechanics clearly.
Why This Matters in the Kona Luxury Market
A large proportion of luxury property owners in the Kona and Kohala Coast market are nonresidents of Hawaii. Resort community estates at Hualalai, Mauna Kea, Kohanaiki, and Kukio are frequently held by Buyers from the mainland US or internationally, precisely the profile to which HARPTA and FIRPTA apply. For these Sellers, a 7.25% withholding on a multi-million dollar transaction is not a trivial event. It is a cash flow disruption that needs to be planned for. Learn more about the communities where this is most relevant on the Marco In Kona communities page.
Marco A. Silva raises HARPTA and FIRPTA early in the listing conversation, connecting Sellers with qualified Hawaii tax attorneys and CPAs who specialize in these transactions. Contact Marco to begin that conversation before you list.
Sources
Hawaiʻi Life: ‘Demystifying HARPTA and FIRPTA: What Real Estate Investors Need To Know’
Hawaiʻi Real Estate Search: ‘HARPTA and FIRPTA’
Maui Elite Property: ‘Understanding HARPTA and FIRPTA in Hawaii’
Frequently Asked Questions: HARPTA and FIRPTA for Kona Sellers
What is HARPTA and who does it apply to?
HARPTA is the Hawaii Real Property Tax Act. It requires that when a nonresident of Hawaii sells real property in the state, the Buyer must withhold 7.25% of the gross sale price and remit it to the Hawaii Department of Taxation on the Seller’s behalf. It applies to all Hawaii real estate sellers who do not maintain Hawaii as their primary state of residence, including mainland US citizens who own vacation or investment properties on the Big Island.
What is the difference between HARPTA and FIRPTA?
HARPTA is a Hawaii state withholding rule that applies to nonresidents of Hawaii. FIRPTA is a federal withholding rule that applies to foreign persons, meaning non-US citizens and non-resident aliens, selling US real property. Both can apply simultaneously to the same transaction if the Seller qualifies as both a Hawaii nonresident and a foreign person.
How much is withheld under HARPTA?
HARPTA withholding is 7.25% of the gross sale price, not the net proceeds or the taxable gain. On a $2 million property, the withholding is approximately $145,000. On a $4 million property, approximately $290,000. This can represent a significant cash flow consideration for Sellers who have not planned for it.
Can HARPTA withholding be reduced or waived?
Yes. Sellers who expect their actual Hawaii tax liability to be less than 7.25% of the gross sale price can apply to the Hawaii Department of Taxation for a withholding certificate to reduce or adjust the required withholding. This process requires advance planning, typically several weeks before closing, and the involvement of a qualified Hawaii tax professional.
When should I start planning for HARPTA if I am considering selling my Kona property?
The planning process should begin well before you list, ideally three to six months in advance. Applying for a withholding certificate, if appropriate, takes time and requires documentation of your anticipated tax liability. Marco A. Silva can connect you with qualified Hawaii tax professionals as part of the early listing conversation.
Important Note: This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Hawaii property tax rules, conveyance tax rates, and withholding requirements are subject to change and vary based on individual circumstances. Buyers and Sellers should consult a qualified Hawaii real estate attorney, CPA, or tax advisor before making decisions based on any information contained here.