There are a few ways to get HARPTA waived. The most common way is if you are a Hawaii resident on the date you close and you report it as such to your escrow company via an N-289 ( if you are not a Hawaii resident, see note below).
Military servicemembers who do not claim Hawaii as their state of legal residency do not qualify to receive an immediate waiver via Form N-289, but it may be possible for them to apply for a waiver by claiming a tax loss, or no taxable gain via Form N-288B and the companion Form N-103.
Also common - if you are doing a 1031 exchange where no cash is pulled out of the transaction, or you are a nonresident who has lived in the home for at least the previous year and your sales price is less than $300,000.
If that doesn't apply, you can apply for a HARPTA waiver if you have a tax loss. Contact us at 808-737-4412 if you'd like to discuss and ask questions.
If you are a nonresident with a gain on your sale and are being asked to bring cash to closing, we may be able to reduce your HARPTA so that you won't have to bring any cash to closing. Contact us to ask how we can assist.
If you are on active duty and you do not declare Hawaii as your state of legal residency, then you cannot get an immediate waiver via Form N-289, but that doesn't mean you'll always have HARPTA withheld - it just means it may take a little more work to get your through this process.
If you have declared Hawaii as your state of residency (which means you should have been paying Hawaii income tax on your military income), then it may be possible to declare that you are a resident via Form N-289 which you will receive from escrow. In order to declare yourself a resident, you must conform to Hawaii residency rules.
If you aren't a Hawaii resident, but have lived in your home as your principal residence for the last year, and the sale is less than $300,000, then you can also inform your escrow company via Form N-289.
However, if neither of the previous situations applies to you, we can still assist you in applying for a HARPTA waiver. There are specific provisions in the U.S. Federal tax code that may allow you to have HARPTA waived.
The application, if approved, will allow you to have nothing withheld for HARPTA, whether you have a gain (within certain federal limits) or a loss.
Please know that a military permanent change of station ("PCS") is NOT a valid reason for an immediate HARPTA waiver, as there is no tax provision in Hawaii tax rules which allow for it. Using a PCS as a reason for an immediate HARPTA waiver via Form N-289 is a violation of these tax rules that could result in a substantial penalty or imprisonment.
And even if there's no way to get a HARPTA waiver before closing, we can always assist you to get an early, tentative refund after closing. Your refund typically takes about 2 months to arrive after filing.
Contact us today to discuss the specifics.
If a home seller is a Hawaii resident on the date they close their sale, they can claim their Hawaii residency on Form N-289 and get an immediate waiver of HARPTA. However, if someone has already moved to a new location, it's not likely that they'll be eligible for an immediate HARPTA waiver due to state residency.
One may claim residency in one of two ways: by domicile, or by physical presence. An individual may usually claim Hawaii residency if they've been in the State for at least 200 days in the current year. However, if the individual's presence is "temporary or transitory" (which is the case when someone is moving to a new location), they cannot use physical presence in the state as justification for Hawaii residency.
If an individual is claiming residency in Hawaii by domicile, that means that even if they're in a new location, their true home is Hawaii. While that means that the individual doesn't have to be present in Hawaii at all, it also means that the person will be required to pay income tax to Hawaii on their "worldwide income". If someone is claiming Hawaii residency for HARPTA purposes, they are obligated to pay income tax like a Hawaii resident, even if that income were earned in a location outside of Hawaii.
If you've moved to a new location, flying back to be present in Hawaii on the date you close does not make you a resident for HARPTA purposes. Having a driver's license, voting in Hawaii, or filing taxes in Hawaii does not automatically make you a Hawaii resident. Obtaining Hawaii residency is much more involved than any one action. It's based on the entirety of your circumstances.
The passage below is from Tax Information Release 2017-01 - Withholding of State Income Taxes on the Disposition of Hawaii Real Property. This is a State of Hawaii publication specifically about HARPTA:
A transferor/seller or transferee/buyer who willfully attempts in any manner to evade or defeat the withholding of taxes or its payment may be convicted of a class C felony and be subject to one or any combination of a fine of not more than $100,000 (not more than $500,000 for corporations), imprisonment of not more than five years, or probation.
A transferor/seller or transferee/buyer who willfully makes and subscribes any return, statement, or other document required to be made regarding the withholding of taxes which contains or is verified by a written declaration that it is true and correct as to every material matter (or willfully aids, assists in, procures, counsels, or advises the preparation or presentation of any tax return, affidavit, claim, or other document required to be made which is fraudulent or false as to any material matter) may be convicted of a class C felony and be subject to one or any combination of a fine of not more than $100,000 (not more than $500,000 for corporations), imprisonment of not more than three years, or probation.
First, if your trust is a revocable trust, we disregard the trust and look to the residency of the grantors of the trust.
Hawaii residents are essentially excluded from HARPTA requirements. Though HARPTA technically applies to all sellers of real property here, Hawaii residents are able to get an immediate exclusion by claiming their residency. The State of Hawaii has even issued a Tax Information Release that explains residency requirements for individuals ( http://files.hawaii.gov/tax/legal/tir/1990_09/tir97-1.pdf )
However, real estate is not always owned by individuals. When a home is owned by a trust or estate, how do we determine whether or not HARPTA applies? The quick answer is that the residency of a trust or estate is determined mainly by Hawaii Administrative Rules section 18-235-1.16 and 1.17, which defines resident (or nonresident) trusts and estates this way (bolding is mine):
§18-235-1.16 “Resident estate”, defined. “Resident estate” means the same as in section 235- 1, HRS. The estate of a decedent who was a resident at the time of death is a resident estate if a Hawaii court appoints a personal representative or administrator to carry on and who does carry on the principal or an ancillary administration of the estate. [Eff 2/16/82; am 9/3/94; am and ren §18-235-1.16 8/28/98] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-1)
§18-235-1.17 “Resident trust”, defined. “Resident trust” means the same as in section 235-1, HRS.
(1) If the administration of the trust is carried on wholly in the State the trust shall be deemed a resident trust irrespective of the place of residence of the fiduciary or fiduciaries.
(2) If the sole fiduciary, or all of the fiduciaries if more than one, are residents, domestic corporations, or partnerships formed under Hawaii law, the trust shall be deemed a resident trust irrespective of the place where the trust is administered.
(3) If the administration of the trust is partly carried on in the State, the trust shall be deemed to be a resident trust if one-half or more of the fiduciaries are residents, domestic corporations, or partnerships formed under Hawaii law. [Eff 2/16/82; am 9/3/94; am and ren §18-235-1.17 8/28/98] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-1)
Once a home seller accepts an offer and goes into contract (also known as entering the escrow process), they are usually given a Form N-289. This is a Hawaii form, and the purpose of this is to claim an immediate exemption of the HARPTA withholding by making one of the 3 claims:
The home seller is a "Hawaii resident"
The sale is a "nonrecognition provision", or
The gross sales price is less than $300,000, and the home seller has lived in the home as their main home for at least the last 1 year
I'll focus on just the second reason: nonrecognition provisions. Here are a couple of definitions of "nonrecognition provisions":
Non recognition provision as applied in tax law refers to a statutory rule that allows all or part of a realized gain or loss not to be recognized for tax purposes. However, this provision only postpones the recognition of the gain or loss.
Nonrecognition provision generally have two common themes. First, nonrecognition is conferred because it is said that the sale or exchange at issue usually involves a mere change in the form of an investment and not a change in the substance of that investment. Second, the realized gain or loss usually never disappears: the unrecognized gain or loss typically carries into the new asset. When the new asset is sold or exchanged in a taxable transaction, the realized gain or loss from the first transaction will then be recognized. Preservation of the unrecognized gain or loss is accomplished by giving the new asset a cost basis equal to the adjusted basis of the old asset. Therefore, when you see a nonrecognition provision, you should expect to see some basis mechanism within that provision that preserves the unrecognized gain or loss. (https://en.wikipedia.org/wiki/Nonrecognition_provisions)
Some home sellers who have filled out the Form N-289 have mistakenly checked the second box and said in the description that they are exempt from HARPTA because they are military servicemembers who are transferring due to military orders. Or they list that they are subject to Section 121 gain exclusion rules, and therefore are immediately exempt. Neither explanation is appropriate for box 2 because neither Section 121, nor permanent changes of station ordered by the military are nonrecognition provisions. To claim an immediate exemption of HARPTA based on either reason is serious tax evasion that is punishable with large fines and even prison time.
Hawaii Tax Information Release 2017-01 (https://files.hawaii.gov/tax/legal/tir/tir17-01.pdf) lists the following types of dispositions as acceptable nonrecognition provisions:
Section 1031 Exchanges (the most common nonrecognition provision, by far)
Sections 102 (relating to gifts/inherited property)
Section 332 & 337 (complete liquidations of subsidiaries)
Section 351 (transfers to corporations controlled by transferor)
Section 721 (nonrecognition of gain/losses on contributions)
Section 1041 (transfers between spouses or incident to divorce)
We have considerable experience helping foreign sellers recover some or all of their FIRPTA withholdings from the Internal Revenue Service (IRS). The IRS is the government agency that processes federal income tax filings. Please know that for at least the last 10 years, the IRS workforce has been shrinking due to deep budget cuts. We can help you file for a FIRPTA early refund, but the IRS may take over a year to refund your money, and neither taxpayers nor tax professionals are given status updates.
Please let us know if you're interested in filing for a FIRPTA early refund. If you do, please ask the buyer to provide you with their information which will include their name (or name of the entity they control), address(es), and taxpayer identification number (social security number, federal employer identification number or individual taxpayer identification number). The filing for an early FIRPTA refund is due by the close of escrow.
The calculation of gain or loss on the sale of your property includes a number of inputs, which will likely include things like your purchase costs, accumulated depreciation (especially if it was a rental), and selling expenses. Also included in this number are your home improvements. Home improvements generally add to the basis of your property, and may be used to lower your gain, or even turn your gain into a loss, putting more money into your pocket when you file for a HARPTA refund.
What defines a home improvement (also referred to as a "capital improvement")? From Hawaii Dept. of Tax - Tax Facts 2010-1 - Understanding HARPTA:
Capital improvements add value to the property and have a useful life in excess of one year, prolong the property's life, or adapts it to new uses. This should not be confused with a repair, which just returns something to its original condition. Capital improvements can include everything from a new bathroom or deck to a new water hearer or furnace. However, this improvement must still be evident when you sell the property.
In addition, this is a description of what is allowable to be reported as an improvement:
If the furnishings are removable without incurring substantial damage to the home, the cost of the furnishings does not increase the basis of the home. For example, the cost of a stand alone refrigerator and drapes cannot be added to the basis of the home...
You are entitled to a benefit for the improvements you've made in your property, but there are also important practical and strategic considerations that should be used to balance your expectations.
HARPTA waiver, reduction, and early refund filers are subject to a much higher level of scrutiny by the reviewers when compared to your annual income tax filings. Home sellers who want to use their improvements to add to their basis need to make sure they have an invoice, as well as proof of payment for the improvement to even be considered. The reviewers often demand this, so we ask our clients to provide it to us.
It's important to understand that for the sake of the early, tentative HARPTA refund, if you leave out the cost of an improvement in your calculation, it's not as if you lose that tax benefit. You will retain that benefit, and you may still report it on your Hawaii income tax return.
Generally speaking, the more improvements you have, the longer it will take for the State to review it and the longer it will take to get your refund, which is why we will often suggest that for the purposes of the early HARPTA refund, to leave improvements off.
If you are a Hawaii nonresident, and you have no Hawaii-sourced income, then no, you probably will not have to file a Hawaii income tax return. An interesting fact about military servicemembers stationed in Hawaii - even though they are stationed here, as long as they claim another state as their "state of legal residency", their military income is not considered to be "Hawaii-sourced", and therefore will not be subject to Hawaii income tax. Because of this, many military servicemembers often get used to not having to file Hawaii income tax returns.
But if a military servicemember is pcs'd (permanent change of station - transfer to new location while on active duty) out of the state, and turns their Hawaii home into a rental, different rules apply. Even if the servicemember continues to claim another state as their resident state, they still need to file a Hawaii tax return. Here's what the instructions for the Hawaii N-15 (nonresident or part-year resident tax return) says:
Every individual doing business in Hawaii during the taxable year must file a return, whether or not the individual derives any taxable income from that business. “Doing business” includes all activities engaged in or caused to be engaged in with the object of gain or economic benefit, direct or indirect, except personal services performed as an employee under the direction and control of an employer. For example, every person receiving rents from property owned in Hawaii is “doing business” and must file a return whether or not the person’s expenses exceed the gross rental income.
When taxpayers file for a HARPTA refund, one of the first things the reviewer does is to check to ensure that all required tax returns were filed, and all taxes paid. So it's important that home sellers who are subject to HARPTA stay current with all of their tax filings. General Excise Tax. Transient Accommodations Tax (if required). And lastly, Hawaii income tax returns for the years you operated the rental.
HARPTA filings fall into one of two categories: before closing and after closing. Prior to closing, reviews are done by the "Office Audit" division. HARPTA filings done after closing go directly to the processing with most individual income tax returns, however in some cases, some returns will be sent over to the Office Audit division for review.
The reviews done before closing are straightforward. For filers trying to get a HARPTA waiver, reviewers need to know that your home sale will not generate any tax, and that the home seller does not have any lingering tax obligations. If a filing can successfully communicate to the reviewer that this is true, a HARPTA waiver (a.k.a. "withholding certificate") is issued.
Reviews done to get a HARPTA reduction are similar, but rather than receiving a complete waiver of HARPTA withholding, the home seller gets a partial waiver. This is allowable only when the seller is in a situation where they have so little equity, were it not for a HARPTA reduction, they'd need to bring cash to closing.
Reviews done for an early, tentative refund are often originally routed with most other paper filed income tax returns. The difference, however, is that because of the large dollar amounts, requests for early, tentative refunds are often scrutinized very closely by the more experienced members of the review teams.
One of the most important differences between a Hawaii income tax return and a HARPTA return (whether it's a request for waiver, or an early refund) is that Hawaii returns don't require many attachments (maybe a W-2 or HARPTA Form N-288A if you are paper filing) to be attached. However, all HARPTA returns are required to be supported by proper documentation and schedules, and the instructions on the form don't tell the preparer specifically what to include or how to present it. A successful filing requires knowledge, obtained by experience.
The property buyer is responsible for collecting HARPTA. Even though your escrow company handles the paperwork and mails the HARPTA funds to the State Department of Tax, it's ultimately the buyer's responsibility to withhold.
However, if the state finds that HARPTA wasn't withheld when it should have been, the seller, the seller's agent, the buyer, or the buyer's agent could be held responsible for covering the uncollected amounts.
Yes, that's fine - we haven't even seen at least 90% of our HARPTA clients face-to-face. All of our work can be done remotely via telephone, email, regular mail, fax, or secure file sharing like ShareFile. If you have an iPhone or iPad, we'd be happy to schedule a time to do a video conference. Or we can set up a Zoom meeting.
We invoice our clients via email, and you can follow a link to pay with a debit or credit card, or you may print out the invoice and mail us a check.
If you are working with a tax professional you trust, we encourage you to rely on their guidance. We can't stress enough how having a good working relationship with your tax professional is important to your financial future.
However, HARPTA filings aren't like your typical annual tax filings for a number of reasons:
Although some of the rules governing HARPTA tax filings mirror federal rules, there are a number of key differences. We have the necessary experience to account for the differences.
Because of the dollar amounts involved, HARPTA filings are reviewed individually by the most experienced agents at the State Department of Tax. We have learned from over a decade of experience exactly what it is they're looking for when they review a filing.
The amount of HARPTA filings that are rejected from tax preparers who aren't familiar with HARPTA filings (even tax preparers in Hawaii) is high. And when applying for a HARPTA waiver, the deadline is dictated by the date of your sale closing, so the seller usually only has one opportunity to ensure that a waiver is granted.