This paper is based upon Hawaii Tax Information Releases #90-14 and
#91-07 as well as input from Ms. Linn Garcia, Income Tax Specialist
at the Hawaii Department of Taxation Technical Section. The
questions and answers are designed to help nonresident (absentee)
owners understand the Hawaii Real Property Tax (HARPTA) Law.
NOTE: Neither Locations LLC nor any of its
agents or employees is licensed to provide either legal or tax
advice. Licensed professionals such as tax attorneys or CPAs should
be consulted for legal or tax advice.
1. What is HARPTA?
HARPTA is an acronym for the Hawaii Real Property Tax Law. HARPTA
is not a tax. This is a common misunderstanding. HARPTA was
enacted to provide a means for the state to collect capital gains
taxes from absentee owners. HARPTA is very similar to laws passed by
several other states as well as to a federal law that applies to
non-US citizens that sell real estate. Under HARPTA, an estimate of
the owner's capital gains taxes is withheld at closing. Prior to
HARPTA, the state had no means of collecting such taxes unless the
absentee owner filed a Hawaii income tax return for the year of the
Some absentee owners are exempt from the HARPTA law. However, the
fact that an owner may be exempt from the HARPTA law does not also
exempt the owner from paying state capital gains taxes that may be
2. How much is collected under the HARPTA law?
The amount collected under the HARPTA law is a flat 5% of the
sales price. Hawaii has determined that 5% of the sales
price provides a reasonable approximation of the capital gains tax
that may be due Hawaii from the sale.
3. What is the actual Hawaii capital gains tax?
Hawaii taxes gain realized on the sale of real estate at 7.25%. Gain
is determined largely by appreciation, how much more valuable a
property is when sold compared to the price paid when it was
purchased. Other factors in determining gain are: (a) capital
improvements made while owning the property (including purchasing
the fee); (b) depreciation claimed while owning the property; and
(c) any deferred gain from a prior sale that was rolled over into
4. If the collected amount is too large, how do you obtain a
If the HARPTA withholding is too large, the owner files a Hawaii
form N288C after closing. Refunds normally take 4-6 weeks except
during the tax season. Hawaii has no provision for filing a form
prior to closing so the correct amount will be withheld.
5. What if there are no proceeds from the sale to pay the HARPTA
HARPTA withholding is not required if there are no proceeds from the
sale. However, escrow will normally not close such a transaction
until a Hawaii form N288B has been approved by the state. The state
requires the N288B form to be submitted to them at least ten days
prior to closing for approval. Accompanying the form must be an
estimated closing statement for the sale prepared by the escrow
office showing that there will be no proceeds to the owner.
NOTE: The N288B form has a section where the owner
indicates if the property has been a rental and if so, the owner's
Hawaii General Excise Tax (GET) number for the property. If you have
not been paying Hawaii GET on your rental receipts, you may have to
pay past GET plus interest in order to have your N288B form be
6. What if there is a loss on the sale rather than a gain?
If the sale creates a capital loss for the owner rather than a
capital gain, all the comments including the note under paragraph #5
also apply. However, the owner must also submit supporting
documentation to show that there will be a capital loss. The
supporting documentation must include (as applicable): a copy of the
closing statement when the property was purchased, documentation
showing depreciation that has been claimed, documentation for any
capital improvements, and documentation for deferred gain from any
prior sale(s) that adjusted the owner's buying basis. Documentation
is also required for question #7 if applicable.
For most owners, we recommend a CPA or tax advisor provide
assistance in preparing the N288B form. It is not unusual for the
state to reject applications because of insufficient documentation.
The N288B form can not be submitted early on, as one of the
enclosures needs to be an estimated closing statement prepared by
the escrow office. There have been situations where owners paid
HARPTA withholding when they had no gain merely to be able to close
their transactions without a delay. The owners were reimbursed after
the sale, however, they could have avoided it had they submitted a
better package prior to the sale.
7. Is Hawaii tax law similar to the Taxpayer Relief Act of 1997?
Yes. This federal law allows an owner to exclude up to $250,000 of
gain (single) or up to $500,000 of gain (married) providing they
have owned and occupied a property for at least two out of the past
8. How does an owner obtain the HARPTA forms?
The various forms associated with HARPTA can be obtained from the
state, refer to the last page of this report for an address. Most
real estate companies should also have them available.
Locations LLC routinely provides HARPTA forms to our clients.
9. What defines a nonresident?
A nonresident owner for purposes of HARPTA is an owner who does not
file a Hawaii resident tax return. There are some exceptions that
apply largely to individuals who travel extensively. These
exceptions lie beyond the scope of this paper, refer to the last
page of the report for a source to contact for additional
10. Does HARPTA apply to military members?
Military members are exempt from the 5% HARPTA withholding at
closing if the sale involves their primary residence and if they are
being transferred from Hawaii under military orders. For purposes of
HARPTA, a military member is defined as someone on active duty when
their Hawaii property closes. Even though HARPTA may not apply, the
military member may still owe Hawaii capital gains taxes.
11. What happens if a military member rents their Hawaii home
rather than selling it?
Once the Hawaii home has been rented, it becomes investment real
estate and HARPTA applies.
12. Are there any exceptions to the HARPTA law?
The HARPTA law does not apply if:
There is no taxable gain on the sale and an approved N288B form has
been received from the state of Hawaii.
b. The owner conducts an IRC 1031 exchange.
c. There are insufficient funds from the sale to pay the withholding
amount and an approved N288B from has been received from
d. In the year prior to the sale, the property was used as a primary
residence and the sales price is $300,000 or less.
though the HARPTA law may not apply, capital gains taxes may still
be due the state. This particularly applies to the exceptions in
12.c and 12.d.above.
13. What do you mean by "no taxable gain?"
No taxable gain applies when there is a loss on the sale rather than
a gain. No taxable gain may also involve transfers of property
incident to a divorce, as a gift, or as an inheritance.
14. What do you mean by an IRC 1031 exchange?
Section 1031 of the Internal Revenue Code (IRC) provides for the
deferment of capital gains taxes realized on the sale of investment
real estate when it is exchanged for other investment real estate.
Under IRC section 1031, if you sell investment real estate and buy
more expensive investment real estate within a prescribed time
frame, you can defer capital gains taxes on the property you are
15. How is HARPTA enforced?
The HARPTA law makes the buyer responsible for paying the HARPTA
withholding if appropriate instructions are not provided to the
escrow company by the seller. Therefore, the Escrow Company will
automatically withhold 5% of the sales price unless the seller can
document that no such withholding is required.
16. Where can I obtain additional information?
The state has a website at www.tax.hawaii.gov
that contains a host of information on Hawaii taxes. The various
HARPTA forms can be downloaded from the site. Insert HARPTA in the
The law itself is short and basic; however, interpretations are very
complex, particularly for individuals who travel frequently making
their residency questionable. Income Tax
Specialists at the Technical Section provide assistance to the
public. We have found them to be very cooperative and generous with
their time. They may be reached at:
State of Hawaii Department of Taxation
P.O. Box 259
Honolulu, HI 96809-0259
Toll free number: 1(800) 222-3229
17. Explain gain further; how does it differ from equity?
Many owners mistakenly use these terms interchangeably. They are
completely different. Gain is the profit received on the sale of a
property. It establishes the basis for both federal and state
capital gains taxes. Equity is the value remaining in a property
after paying off the mortgage (and any other liens). Equity is the
amount of money you will receive from the sale before paying the
costs to sell.
Your mortgage balance impacts upon equity and what you'll net out of
the sale of a property but has nothing to do with gain. Your gain on
any specific property is the same regardless of whether you own the
property free and clear or have a sizable mortgage balance. For
example, assume you own property worth $250,000 free and clear or
without a mortgage. If you were to sell the property and your
closing costs were $20,000, you would net $250,000 less the $20,000
in closing costs or $230,000. If you had refinanced this same
property and had a mortgage balance of $200,000, you would net
$250,000 less the $200,000 mortgage balance less the $20,000 in
closing costs or $30,000. However, your gain in either case would be
Gain is determined largely by appreciation, how much more valuable a
property is when you sell it compared to the price you paid when you
bought the property. Other factors in determining gain: (a) Capital
improvements you have made while owning the property (including
purchasing the fee). (b) Depreciation you have claimed while owning
the property. And (c), any deferred gain you may have had from a
prior sale that was rolled over into the property when you bought it
above information is for informational purposes only and should
always be verified by an accountant or other tax professional
Hawaii real estate company with "The Perceptible
Locations LLC ~614 Kapahulu Avenue Suite 200~ Honolulu, Hawaii 96815