A “Moving” Tax and Your Bottom Line!

In 2016, the Federal government increased the withholding to 15% of the gross proceeds any time a foreign seller conveys property. Escrow will also withhold an additional 7.5% because the foreigner is not a Hawaii resident. The 7.5% withholding applies to all out-of-state owners.

FIRPTA and HARPTA

Buyer and seller alike should be aware of nuances pertaining to the Foreign Investor Real Property Tax Act (FIRPTA) and the Hawaii Investor Real Property Tax Act (HARPTA). As soon as an escrow is opened, escrow forwards an affidavit to the seller. A copy of the completed affidavit is provided to the buyer. It’s important that the buyer retain this paperwork. If not, the buyer could be held responsible for any tax a seller fails to pay! The buyer is not obligated to investigate statements on the affidavit. They must simply produce a copy if questioned. Any gain will trigger withholding. Sellers able to show a loss may apply for a withholding waiver. This should be done well in advance. Values have gone up so a seller with no gain or one with a loss should be a red flag to the REALTORS®. They can advise accordingly. A State withholding exemption should be received by the State at least 10 days prior to closing.

Foreign sellers should allow 6 weeks for approval of a withholding exemption from the Federal Government. When withholding is required, sellers with no other income can file for a refund right after closing. The State extends residency courtesy for one year from the date the resident relocates outside the State. The assumption is that sellers leaving Hawaii will need to file at least one more tax return as residents.

Other Tax Scenarios

Sellers participating in a 1031 exchange are not subject to HARPTA/FIRPTA withholding because they are deferring their gain. Seller financed sales may be subject to either incremental withholding or lump sum withholding, depending on when title passes. It’s important to consider how the HARPTA/FIRPTA withholding will impact the required down payment on a seller financed contract. Resident aliens are regarded as residents for the purposes of withholding.

So, if a move is in your future, be sure your agent checks seller residency early on. Late filed exemptions can delay closing which could, in turn, affect the buyers loan. When it comes to real estate sales, surprises are rarely a good thing! Come back next week to discuss other real estate tax related issues!