Hawaii Capital Gains Tax: Rates and Rules for Filing

A capital gain is the profit from selling an asset, like real estate or stocks, for more than its purchase price. The state of Hawaii imposes a tax on these gains as part of its income tax system. This tax applies to both residents and non-residents who sell property in the state. The amount of tax owed depends on specific rules and rates, which can differ based on how long the asset was held before being sold.

Hawaii’s Capital Gains Tax Rates

Hawaii’s capital gains tax rates are determined by the asset’s holding period. This period establishes if a gain is classified as short-term or long-term, which directly impacts the tax rate applied.

An asset held for one year or less generates a short-term capital gain. Hawaii taxes these gains as ordinary income, meaning the profit is added to the taxpayer’s other income, like wages, and taxed at the state’s progressive rates. For 2024, these rates range from 1.4% to 11%, so a large short-term gain could move a taxpayer into a higher tax bracket.

Conversely, assets held for more than one year qualify for long-term capital gains treatment. Hawaii applies a flat tax rate of 7.25% to these gains, regardless of the taxpayer’s income bracket. This rate can result in a lower tax liability compared to short-term gains.

This state-level tax is separate from and in addition to any federal capital gains tax. The federal system also has its own set of rates for short-term and long-term gains. Therefore, the total tax impact on a capital gain includes both a federal and a Hawaii state component.

Calculating Your Hawaii Capital Gain

The formula for a capital gain or loss is the asset’s selling price minus its adjusted cost basis. This calculation determines the profit that is subject to tax.

The “cost basis” is generally the original purchase price of the asset. This includes the amount paid for the asset itself, plus other costs incurred during the acquisition, such as commissions or fees. This basis can be modified over time, resulting in the “adjusted basis.”

An asset’s adjusted basis can increase or decrease. For real estate, the cost of capital improvements, such as adding a new room, increases the basis. Deductions for depreciation, which are common for rental properties, will decrease the basis.

Finally, selling expenses like real estate commissions and legal fees are subtracted from the selling price to determine the “amount realized.” For example, if a property was bought for $400,000, had $50,000 in improvements, and sold for $600,000 with $30,000 in selling costs, the capital gain is $120,000. This is calculated from the $570,000 amount realized minus the $450,000 adjusted basis.

Primary Residence Sale Exclusion

A tax benefit is available to homeowners when they sell their primary residence. Hawaii conforms to the federal tax rules under Section 121 of the Internal Revenue Code, which allows for a substantial exclusion of the capital gain from taxation.

The exclusion amount is up to $250,000 of the gain for a single filer and up to $500,000 for a married couple filing a joint return. If the calculated capital gain is below these thresholds, the homeowner may not owe any capital gains tax on the sale.

To qualify, a taxpayer must satisfy both an ownership test and a use test. The ownership test requires owning the home for at least two of the five years leading up to the sale date. The use test mandates living in the home as a primary residence for at least two of the five years before the sale, and these two-year periods do not need to be continuous.

There are also limitations on how frequently this exclusion can be claimed. Generally, a taxpayer can only use the home sale exclusion once every two years. If a taxpayer sells another primary residence within two years of using the exclusion, they will likely not be eligible to exclude the gain from the second sale.

Reporting and Paying Hawaii Capital Gains Tax

After calculating the taxable gain, the amount must be reported and the tax paid to the Hawaii Department of Taxation. This process involves specific forms and, in some cases, prepayment of the estimated tax liability.

To report capital gains, taxpayers in Hawaii use Hawaii Schedule D, which is filed alongside their annual income tax return, either Form N-11 for residents or Form N-15 for non-residents. The process often begins with completing the federal Schedule D, as information from that form is used to complete the state-level form.

For those who realize a large capital gain, waiting until the annual tax filing deadline to pay could result in underpayment penalties. To avoid this, taxpayers may be required to make estimated tax payments. These quarterly payments are submitted using Form N-200V to cover the tax liability from the gain.

A special rule applies to non-resident owners of real estate in Hawaii. The Hawaii Real Property Tax Act (HARPTA) requires a withholding from the proceeds of a real estate sale by a non-resident, at a rate of 7.25% of the amount realized. This withholding, reported on Form N-288, is a prepayment, and the non-resident must still file a Hawaii tax return to reconcile the amount withheld with their actual tax liability.