Withholding Tax on Sales of Oahu Real Estate by Nonresident Persons
To promote a greater level of compliance by non-residents of Hawaii (whether US citizens or foreigners) in reporting income from the sales of Oahu real estate or other real estate in Hawaii, Section 235-68, Hawaii Revised Statutes (“HRS”), requires that every Buyer of Oahu real estate enforce the deduction and withholding of taxes and pay to the Hawaii Department of Taxation 5% of the amount realized by the Seller or transferor of Oahu real estate.
(NOTE: Seller actually pays this, but Buyer is required to enforce the payment by withholding the amount from the sale price in escrow.)
This 5% withholding is designed to enforce Hawaii state income taxes on the sale or disposition of Hawaii real estate in the same manner as the enforcement provisions of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Similar to FIRPTA enforcement provisions, the state tax withholding requirement would not increase the amount of income tax paid by non-residents since the amount withheld will be claimed as a payment on the Hawaii nonresident income tax return.
HARPTA applies to the sale of property located in Hawaii by owners who are non-residents of Hawaii, but certain exemptions apply.
Here are the instructions from the State of Hawaii on when an exemption would apply.
Federal Withholding Tax on Sales of Oahu Real Estate by Foreign Persons
The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) provides that foreign investment in U.S. real property would be subject to U.S. capital gains tax on dispositions of US real property interests. To administer and enforce FIRPTA, the US Congress in 1984 enacted Section 1445 of the Internal Revenue Code (“IRC”). Under the FIRPTA withholding provisions of the IRC Section 1445, the buyer or transferee of any US real property is required to withhold and deduct a tax equal to 10% of the amount realized by the Seller or transferor upon the disposition of property, with certain other requirements.
As with HARPTA, certain exemptions apply.