How to Report HARPTA Withholding and Understand Its Requirements

Hawaii’s real estate market has unique tax implications through the Hawaii Real Property Tax Act (HARPTA), which mandates withholding a portion of proceeds from property sales by non-residents to ensure tax compliance. Understanding HARPTA is essential for anyone involved in these transactions.

Real Estate Subject to HARPTA

HARPTA applies to real estate transactions involving non-resident sellers, with a withholding rate of 7.25% of the gross sales price as of 2024. This includes residential, commercial, and industrial properties, regardless of their use. The key factor is the seller’s residency status. The withheld amount serves as a prepayment of the seller’s potential state tax liability. If the withholding exceeds the actual tax owed, the seller may qualify for a refund.

Parties Involved in Withholding

The main parties in HARPTA withholding are the buyer, seller, and escrow company. The buyer, acting as the withholding agent, must withhold the correct amount from the sales proceeds and remit it to the Hawaii Department of Taxation. The seller, typically a non-resident, provides information such as Form N-289 to facilitate the withholding and may apply for a waiver or reduced rate if the standard amount surpasses their actual tax liability. The escrow company oversees the funds and ensures compliance, coordinating between both parties.

Calculating Withholding Amount

The withholding amount is calculated as 7.25% of the gross sales price, which includes all considerations paid for the property. For instance, a $500,000 sale results in a $36,250 withholding. Buyers must maintain accurate documentation, such as the purchase agreement, to support the calculation. Sellers can apply for a waiver by submitting detailed financial information to the Hawaii Department of Taxation before closing to demonstrate a lower tax liability.

Reporting Guidelines and Documents

Buyers are required to submit Form N-288, Statement of Withholding on Dispositions by Nonresident Persons, along with the withholding payment, to the Hawaii Department of Taxation by the 20th day of the month following the property transfer. Additionally, buyers must provide the seller with Form N-288C, a receipt for the withholding, which the seller needs to complete their state tax return. Timely and accurate submission of these forms is crucial to avoid penalties.

Refund or Reduced Withholding

Sellers may qualify for a refund or reduced withholding if the standard amount exceeds their actual tax liability. To request a reduced withholding, sellers must file Form N-288B, Application for Withholding Certificate for Dispositions by Nonresident Persons, before closing. This form requires a detailed calculation of anticipated tax liability, including deductions and credits. If approved, the Hawaii Department of Taxation issues a withholding certificate specifying the reduced amount. Sellers who have paid the full 7.25% can claim a refund by filing a Hawaii state income tax return, reconciling the withheld amount with their actual tax liability.

Penalties for Noncompliance

Failing to comply with HARPTA withholding requirements can lead to serious financial and legal consequences, particularly for the buyer, who serves as the withholding agent. Buyers who fail to withhold or remit the correct amount may face penalties, interest charges, and legal action. Under Hawaii Revised Statutes Section 235-68, buyers can be held personally liable for the full amount that should have been withheld, along with interest. A penalty of up to 25% of the required amount may be imposed for willful neglect or failure to comply. Sellers providing false information may also face penalties. Consulting tax professionals or legal advisors is recommended to ensure compliance and avoid these risks.