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Tax Consequences for Non-Resident Sellers

FIRPTA, HARPTA, the HAR Purchase Contract, and ITINs for Non-Resident Taxpayers

One of the first things to consider when purchasing a property in Hawaii is US and Hawaii tax strategy. I strongly suggest to all of my foreign and expatriate clients that they consult with an attorney or CPA tax specialist who focuses on tax issues for nonresident foreigners.

Recent changes in federal and state estate and gift taxes allow substantial exemptions ($5.25 million or $10.5 million for married couples) for US tax payers, but these are not available to non-residents unless they have taken steps to protect their assets from US taxation.

Tax strategies, including estate planning, can be extremely complex, and are constantly changing. For example, Canada and Japan have bilateral tax treaties with the US, while China and many other countries do not. Even where treaties are in place, taking title to Hawaii property as a nonresident foreigner may not be the best way to protect it from US and Hawaii taxation.
FIRPTA and HARPTA are fairly simple examples of this, and a good place to start in considering the challenges of owning property in Hawaii—and the huge potential benefits of getting good tax and estate planning advice from the very beginning.

The disposition of a U.S. real property interest by a foreign person (the transferor/seller) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) for federal income tax withholding and HARPTA (Hawaii Real Property Tax Act: Hawaii Revised Statutes Section 235-68), which is patterned after FIRPTA.

The basic rate for FIRPTA is 10% of the gross sales price of the transferred property, and for HARPTA, the basic rate is 5%. The transferee/buyer is responsible for determining whether the seller is a foreign person and for withholding the appropriate amounts and forwarding to the IRS or Hawaii Department of Taxation. It is important to understand that FIRPTA and HARPTA are estimated tax payments (withholding) based on the gross sales price of the subject property, and that in most cases the seller will be entitled to refunds once tax returns for the year of the disposition have been filed.
The following websites are useful for FIRPTA http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding and HARPTA http://www6.hawaii.gov/tax/taxfacts/tf2010-01.pdf.

Section P of the Purchase Contract deals with the Foreign and Non-Resident Buyer And/Or Seller. Paragraph P-1 “HARPTA’” and P-2 “FIRPTA” state: “If Seller does not provide Buyer with a certificate of exemption of waiver from P-1 HARPTA/ P-2 FIRPTA within fourteen (14) days of the Acceptance Date, Escrow is hereby authorized and instructed to withhold/collect from Seller the required amount at closing and forward it to the P-1 State Department of Taxation/P-2 the IRS.”
The problem here is that this 14-day timeline is a mismatch with the realities of obtaining FIRPTA and HARPTA exemptions or waivers. Escrow companies in Maui are reporting that a FIRPTA waiver, if done correctly, may take 90 to 120 days, and the State of Hawaii requires at least 10 business days to approve HARPTA waivers.
Non-resident foreigners must have a ITIN in order to file Form 8288-B, the Application for Withholding Certificate for Disposition by Foreign Persons of US Real Property Interests, which is the relevant form for reduction or elimination of the FIRPTA withholding amount.
If a non-resident foreign buyer does not have an Individual Taxpayer Identification Number (ITIN), it is important to know that the application process (the relevant forms are W-7 and W-7SP) has undergone significant changes as of June 22, 2012 involving more documentation and, of course, considerably more time for processing, which may create delays in closing a real estate transaction where FIRPTA and HARPA are involved.

FIRPTA, HARPTA, ITINs, and the Hawaii Association of Realtors Purchase Contract combine to pose some serious logistical challenges, but these are fairly simple when compared to estate and gift tax issues. Ultimately, taxation issues for nonresident foreigners and expats require expert legal and accounting advice.

While many of our clients come to Hawaii already prepared to deal with these issues, Coldwell Banker Island Property agents who specialize in assisting foreign buyers and sellers are prepared to refer clients to a wide range of qualified experts in tax and estate planning, including private banking teams with country-specific expertise, or Hawaii-based attorneys and accountants who deal with issues unique to Hawaii.

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