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

Investing in Hawaii real estate can be rewarding, but understanding tax laws is critical—especially for out-of-state or foreign investors. Two key regulations to know are HARPTA (Hawaii Real Property Tax Act) and FIRPTA (Foreign Investment in Real Property Tax Act). These laws affect how much tax must be withheld when selling property in Hawaii and can impact your bottom line if not properly navigated.

What is 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.

HARPTA Withholding Rules

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.

How to Apply for HARPTA Exemptions

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.

What is 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.

FIRPTA Withholding Rules

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 and Special Cases

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.

Tips for Navigating HARPTA & FIRPTA

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.