HARPTA: The Tax Withholding Affecting All Nonresident Sellers

 

Note: The HARPTA information contained herein is a summary of information provided in the document titled “Understanding HARPTA,” issued by the State of Hawaii, Department of Taxation. This information is provided for informational purposes only. I am not licensed to provide either legal or tax advice. All information provided below should be discussed and verified with a tax attorney, CPA or other licensed professional.

HARPTA is an acronym that stands for Hawaii Real Property Tax Act, which is the name of a tax law in the state of Hawaii. In practice, the term “HARPTA” is used to reference the effect of that law, which is, “the mandated withholding of tax on the disposition of real property by nonresident persons.” HARPTA is patterned after the federal Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Like FIRPTA, the intent of HARPTA is to insure compliance with Income Tax law by nonresidents. It does so by requiring the buyer of real property in Hawaii to withhold up to 7.25% of the amount realized (the sale price in most cases) in the sale of the real property by a nonresident seller, and forwarding this amount to the Department.

 

HARPTA is not a tax per se. Rather, the 7.25% amount paid to the Department by the buyer is an estimated tax payment made for the benefit of the seller, taken out of monies otherwise due to the seller. The buyer is acting as a withholding agent. When the seller files its Hawaii income tax return showing the amount of tax due as a result of the sale, the amount of any taxes due is reduced by the amount of the HARPTA payment (as well as any other estimated tax payments, state tax credits, etc). If the 7.25% amount paid exceeds the amount of the tax liability, the seller is entitled to a refund of the overpaid amount. If a balance remains due, the seller is responsible for paying the balance.

 

HARPTA applies whenever real property located in Hawaii is transferred. A common misperception is that HARPTA does not apply under certain conditions, such as when the seller is a resident of Hawaii. In fact, HARPTA does apply, but the buyer may be exempt from the withholding requirements of HARPTA if the Seller provides them with Form N-289 “Certificate for Exemption from the Withholding Tax on the Dispositions by Nonresident Persons of Hawaii Real Property Interests.” If the seller does not provide such certificate, the buyer is required to withhold the 7.25% in all circumstances.

 

A nonresident is any person (or entity) other than a resident person. A resident person is defined as:

 

• Individual domiciled in the State or who resides in the State for other than a temporary or transitory purpose. Domicile is the place of the individual’s true, fixed, permanent home (for more information on domicile and residency, see Tax Information Release No. 97-1, “Determination of Residence Status”);
• Corporation incorporated or granted a certificate of authority under chapter 414, 414D, or 415A;
• Partnership formed or registered under chapter 425 or 425E;
• Foreign partnership qualified to transact business pursuant to chapter 425 or 425E;
• Limited liability company formed under chapter 428 or any foreign limited liability company registered under chapter 428, other than a single member limited liability company that has not elected to be taxed as a corporation;
• Limited liability partnership formed under chapter 425;
• Foreign limited liability partnership qualified to transact business under chapter 425;
• Trust where the trustee, or other fiduciary, is a resident of Hawaii or the administration of the trust is carried on in Hawaii; or
• Estate of a resident decedent if a Hawaii court appoints a personal representative or administrator
  
  

“Real property” is defined in HRS §231-1 and “includes all land and appurtenances thereof and the buildings, structures, fences, and improvements erected on or affixed to the land, and any fixture which is erected on or affixed to the land, buildings, structures, fences, and improvements, including all machinery and other mechanical or other allied equipment and the foundations thereof, whose use is necessary to the utility of the land, buildings, structures, fences, and improvements, or whose removal therefrom cannot be accomplished without substantial damage to the land, buildings, structures, fences, and improvements, excluding, however, any growing crops.”

 

The buyer must submit the proper forms and withheld amounts to the Department not more than twenty days following the transfer date (the date on which the sale closes and title to the property passes from the seller to the buyer). Failure to file the return or to timely pay the amount due may result in the imposition of penalties and/or interest.

 

For more information regarding HARPTA, read the complete original document issued by the State of Hawaii, Department of Taxation, “Understanding HARPTA.”