Selling a property can be a complicated process, especially when it comes to taxes. If you’re a property owner in Hawaii, there are two specific tax laws you should be aware of: Harpta and Firpta. Both of these regulations aim to collect taxes from foreign owners of US properties. In this blog post, we’ll delve into the details of Harpta and Firpta and what they mean for you as a property seller in Hawaii.
Harpta: What is it?
Harpta stands for Hawaii Real Property Tax Act, which was enacted in 2017. Harpta was created to ensure that all sellers of Hawaii property, both residents and non-residents, pay the proper amount of taxes. The law is applicable to anyone who sells Hawaii real property; however, Harpta primarily seeks to gather taxes from out-of-state owners as they are often difficult to track down. Under Harpta, non-resident sellers of Hawaii property are required to pay 7.25% of the property’s sales price as tax. However, if the seller files for a Hawaii tax return, they can receive 5% of that amount back as a credit towards their income tax liability.
Firpta: What is it?
Firpta stands for Foreign Investment in Real Property Tax Act. This law was put into place in 1980 as an effort to collect taxes from foreign persons who make gains from the sale of US real property interests. The law applies to both foreign nationals and US citizens who hold dual citizenship with a foreign country. Under Firpta, the buyer is required to withhold 15% of the purchase price from the seller’s proceeds as tax. The withheld amount is then sent to the IRS by the buyer. However, a seller can apply for exempt status from Firpta or apply for a lower withholding rate if they can prove they are not making a profit from the sale of the property.
Applying for Exemption
As mentioned, both Harpta and Firpta have exemption options that sellers can apply for. In the case of Harpta, sellers must apply for exemption before the closing of the property sale. The seller must have a Qualified Intermediary (QI) to file for exemption and must declare in their application that they are using the property for specific purposes, including religious, charitable, or educational programs. For Firpta, exemptions include the “Residential Exemption” and “Non-Foreign Certification.” The “Residential Exemption” applies if the property is their primary residence and if they have lived in it for two of the five years prior to the sale. The “Non-Foreign Certification” applies if the seller is a US citizen, has provided evidence of tax returns in the two years prior to the sale, and will receive no more than $300,000 in net proceeds from the sale.
Selling a property is already challenging, and tax laws like Harpta and Firpta could make it even more complex. However, understanding these regulations is crucial for sellers in Hawaii, whether they are US citizens or foreign nationals. Applying for exemptions and understanding these laws can result in significant benefits, including lower tax rates or even exemption from taxes altogether. It’s always advisable to work with a qualified attorney or tax advisor to navigate these regulations, ensuring a clear and smooth transaction. While it may seem hard to decipher these tax laws, when the explanations are broken down, it can be simple. In conclusion, sellers must be well aware of Harpta and Firpta to avoid any mistakes and legal problems that may incur during the selling process.
