If you’ve sold or are in the process of selling a home in Hawaii, you may have come across forms from your escrow officer regarding HARPTA. What the heck is that.
So, HARPTA stands for Hawaii Real Property Tax Act. If you are a non-Hawaii resident, the state of Hawaii may withhold 7.25% of the gross sales price from your proceeds when you close on the sale. For many sellers, this seems unfair and they look for ways around it.
I just had a chat with someone this week about a non-resident of Hawaii trying to avoid paying their HARPTA withholdings. One thing I have to say is I would never give anyone advise to falsely state they are a Hawaii resident just to avoid the withholding. What that person needs to know is that, once, they file their tax return for the year, they will get back what they deserve from that withholdings and be made whole again, it’ll just take some time.
This question sometimes comes up with clients and investor friends about why the heck does the state of Hawaii do this? It’s so unfair! And they may be right. However, I think we need to take a step back and look at it from the state of Hawaii’s side. If the state didn’t withhold anything and the out-of-state seller owed taxes on the gain of the sale, what recourse would the state of Hawaii have to collect it? Sellers should also know that, if there is no taxable gain, there are some options like HARPTA waivers or early refunds. Sellers may also be able to eliminate the withholdings in certain instances if they are military. So, if you think you may fall into one of these categories and you want to avoid the withholdings, you may have a case. Let me know and we can talk through it.
However, I think the vast majority of non-Hawaii resident sellers of real estate will most likely have the HARPTA tax withheld until they file their state of Hawaii tax return for that year. Again, I would not suggest anyone falsify their residency just to get around the withholding. Just keep in mind, you’ll get back what’s yours, it’ll just be a bit before you do.
In the words of the American Economist, Lawrence Summers, “All taxes discourage something. Why not discourage bad things like pollution rather than good things like working or investment?”
DISCLAIMER: I am in no way giving out professional tax advice. All situations are different so please talk to your personal tax specialist for advice on your situation.
