MAUI SELLER'S GUIDE

HARPTA AND FIRPTA: WHAT SELLERS AND FOREIGN NATIONALS NEED TO KNOW

By Harrison McCandless, REALTOR®   |   Coldwell Banker Global Luxury   |   RS-86552

A client of mine read her settlement statement twice at the closing table, set it down, and asked where a fifth of her sale price had gone. It had gone to two governments, one in Honolulu and one in Washington, and it was on its way back to her. Eventually. Both governments had reasons that satisfied them. Neither felt any obligation to explain those reasons at the table.

If you are selling on Maui and you don't live in Hawaii, or you carry a passport from somewhere other than the United States, this is money to understand before it surprises you. Two acronyms do the surprising. Here is what each one is, why it exists, and how to keep it from tying up a fortune.

HARPTA is the Hawaii Real Property Tax Act, a state law. When someone who is not a Hawaii resident sells real property here, the buyer withholds 7.25% of the sales price and remits it to the Hawaii Department of Taxation. The rate has held at 7.25% since 2018. Note the word resident. Not citizen. A seller in Portland is subject to HARPTA. So is a seller in Calgary, and so is a seller in Seattle who has never once thought of herself as foreign anything.

FIRPTA is the Foreign Investment in Real Property Tax Act, a federal law from 1980. When a foreign person sells United States real property, the buyer withholds up to 15% of the sales price for the IRS. This one turns on citizenship, or more precisely on whether you count as a foreign person for tax purposes, which is not always the same question.

So: two statutes, two acronyms, two governments, each with its own library of forms. If you are a Canadian selling a condo in Kihei, congratulations. You have qualified for both.

Neither withholding is a tax. Both are collection devices, and the logic is identical in Honolulu and in Washington. A seller who lives in Alberta closes on Tuesday, wires the proceeds home on Wednesday, and is a very long way from a tax notice by Thursday. So the money comes out at closing, before it can leave the island. What's withheld is a deposit against whatever tax you owe on the sale. It is a deposit, not a verdict. Overpay now, reconcile later, and in most cases get a good share of it back.

HARPTA takes 7.25% of the amount realized, which is the gross sales price rather than your gain. A seller who bought at the peak and is selling at a loss still watches 7.25% of the full price come out, profit or no profit. The withholding does not ask whether you made money.

The mechanics run on a short alphabet of forms. Form N-289 is the exemption certificate, used to certify that withholding isn't required for one of three reasons: the seller is a Hawaii resident, the sale produces no recognized gain under the tax code, or the property was the seller's principal residence and the price is under $300,000. Form N-288 is the return the buyer or escrow files to send the money in, due by the twentieth day after closing. Form N-288B is the one that saves people real money: filed before closing, it asks the state to reduce the withholding to the tax you will owe. Form N-288C requests an early refund after closing instead of waiting for tax season. And Form N-15 is the nonresident Hawaii return where the whole thing finally squares up.

It is a lot of paper for one sale. Hawaii, to its credit, numbers the forms in a sequence that nearly tells a story: 289 to avoid it, 288 to pay it, 288B to shrink it, 288C to get it back early, and N-15 to settle up. Nearly.

FIRPTA withholds 15% of the sales price when the seller is a foreign person, with two exceptions that turn on price and on what the buyer plans to do with the place.

FIRPTA RATE BY PRICE AND BUYER'S USE

Read those exceptions again for what they require: a buyer who intends to move in. In Wailea and Ka'anapali, most luxury condos change hands as second homes, rentals, or someday-homes, not primary residences a buyer will occupy half the year. So in practice, most of my foreign sellers are looking at the full 15%.

The buyer is the withholding agent here too, filing Forms 8288 and 8288-A within twenty days of closing. Form 8288-B is FIRPTA’s certificate: filed before closing, it asks the IRS to bring the hold down to your expected tax. One piece of housekeeping no foreign seller can skip is a U.S. taxpayer ID number, an ITIN, requested on Form W-7. Start that early. The IRS works these on its own schedule, and its schedule is not yours.

Here is the scene from the top of this piece. A foreign national sells a condo above one million dollars. HARPTA takes 7.25%. FIRPTA takes 15%. Together that is 22.25% of the gross price, withheld at the table, before anyone has checked whether you owe that much.

The figure is real even when the tax owed is a fraction of it, because both withholdings come off the full price and ignore your gain. A seller with a modest profit can still watch close to half a million dollars leave the table and take months to find its way home.

The fix for both is one idea, filed in two places. Before closing, apply to have the withholding matched to the tax you will owe rather than to a flat percentage of the price. For HARPTA, that is Form N-288B. For FIRPTA, Form 8288-B. Approved, they can bring a five- or six-figure hold down to something near your real liability, and sometimes to nothing.

Timing is the whole game. File the certificate applications early, well ahead of the closing date, with an ITIN in hand or in progress for the federal side. File them late and you withhold at the statutory rate, then spend the next several months chasing the refund. The federal certificate alone runs about ninety days to process. No one has ever accused this system of moving quickly.

HARPTA turns on Hawaii residency. FIRPTA turns on whether you are a foreign person under federal tax law. Different tests, and the second one catches people. A green-card holder is generally a U.S. person for tax purposes and sits outside FIRPTA. Someone who spends enough days in the country each year can meet the substantial-presence test and count as a U.S. person as well, passport aside. Which withholding applies, and at what rate, rides on this determination, so it is worth an hour with a CPA before you list rather than a surprise at closing.

If you are the one buying, read this part twice. Under both statutes, the buyer is the withholding agent. The legal duty to withhold and remit sits with you, the buyer, and escrow's help with the mechanics does not move it. Get it wrong on a foreign seller and the IRS can look to you for the money it never received.

I raise it because so many of my buyers come from Calgary, Vancouver, and Seattle, and a good number of them will be sellers one day. The Canadian who buys into Ka’anapali this year becomes a foreign seller the day she sells, and the same math that shapes her purchase runs in reverse at her exit. Useful to know going in.

It is worth knowing, too, for anyone selling out of an apartment-zoned rental ahead of the West Maui phase-out under Bill 9. The phase-out changes what you can do with the property. It changes none of this. A seller is a seller, and the withholdings find them all.

The client who read her statement twice got her money back, most of it, a few months later, once the returns cleared. The next time she sold she filed the certificate application six weeks ahead, and the fifth of her proceeds that had once disappeared stayed where it belonged. The paperwork was still dull. On Maui, at these numbers, dull is worth your full attention.

Does HARPTA only apply to foreign sellers?

No. HARPTA applies to any seller who is not a Hawaii resident, including sellers who live on the U.S. mainland, and it withholds 7.25% of the gross sales price. FIRPTA is the separate federal law that applies specifically to foreign persons.

How much is withheld if a foreign national sells Maui property for more than $1 million?

Both withholdings can apply. HARPTA takes 7.25% and FIRPTA takes 15% of the gross sales price, for a combined 22.25% held at closing, before the tax owed on the sale is calculated.

Is the HARPTA or FIRPTA withholding my final tax bill?

No. Both are deposits against the tax you may owe on the sale, and both are calculated on the gross price rather than your gain. You reconcile by filing a return, and any over-withheld amount is refunded.

Can I reduce the amount withheld?

Yes, if you apply before closing. Form N-288B for HARPTA and Form 8288-B for FIRPTA ask the state and the IRS to match the withholding to your expected tax. File early, since processing takes time, roughly ninety days on the federal side.

Do foreign sellers need a U.S. tax ID number?

Generally, yes. A foreign seller needs an ITIN, requested on Form W-7, for the IRS to process FIRPTA paperwork and any refund. Start the application well before closing.

Who is legally responsible for withholding?

The buyer is the withholding agent under both HARPTA and FIRPTA. Escrow usually handles the mechanics, but the legal responsibility sits with the buyer, which matters most when the seller is a foreign person.