Demystifying HARPTA and FIRPTA: What Real Estate Investors Need to Know

Real estate investment can be a lucrative venture, especially in popular destinations like Hawaii. However, navigating the complex landscape of tax laws and regulations is crucial for investors to maximize their returns and avoid potential pitfalls. Two important regulations that often come into play for out-of-state and foreign investors in Hawaii are HARPTA and FIRPTA. Let’s delve into what these regulations entail and how they impact real estate transactions in the Aloha State.

Understanding HARPTA

Hawaii Real Property Tax Act (HARPTA) is a state tax withholding law that applies to sellers of Hawaii real estate who are not residents of the state. The primary purpose of HARPTA is to ensure that non-resident sellers pay their state income taxes on gains realized from the sale of Hawaii real property.

Under HARPTA, the buyer of Hawaii real estate is required to withhold a certain percentage of the purchase price and remit it to the Hawaii Department of Taxation at the time of closing. The withholding rate is currently set at 7.25% of the sales price (not your net proceeds). However, sellers have the option to apply for an exemption from withholding from the Hawaii Department of Taxation to reduce or eliminate the withholding requirement if they can demonstrate that the actual tax liability is lower. Your local escrow team can assist with this process if it’s applicable to your transaction.

It’s important for both buyers and sellers to be aware of HARPTA requirements when engaging in real estate transactions in Hawaii, as failure to comply can result in penalties and delays.

Deciphering FIRPTA

Foreign Investment in Real Property Tax Act (FIRPTA) is a federal tax law that applies to foreign sellers of U.S. real estate, including Hawaii. Similar to HARPTA, FIRPTA requires buyers to withhold a percentage of the purchase price and remit it to the Internal Revenue Service (IRS) at the time of closing.

Under FIRPTA, the withholding rate is generally set at 15% of the gross proceeds. However, like HARPTA, sellers can apply for an exemption from withholding from the IRS to reduce or eliminate the withholding requirement if they can demonstrate that the actual tax liability is lower.

FIRPTA exemptions may apply in certain situations, such as when the sales price is below a certain threshold or when the property is used as a primary residence by the seller. It’s essential for foreign sellers to consult with tax professionals familiar with FIRPTA regulations to ensure compliance and maximize tax savings.

Navigating HARPTA and FIRPTA regulations is essential for real estate investors looking to buy or sell property in Hawaii. Understanding these tax withholding laws can help investors avoid unexpected expenses and compliance issues, ultimately allowing them to make informed decisions and maximize their returns. Whether you’re a local buyer or a foreign investor, consulting with knowledgeable real estate professionals and tax advisors is key to navigating the intricacies of HARPTA and FIRPTA and achieving success in the Hawaiian real estate market.