What we do
At DVC FIRPTA we are dedicated to helping Disney Vacation Club members who are non residents of the United States to understand and complete the required tax forms to avoid or expediate their state tax refund.
The Foreign Investment of Real Property Tax Act or FIRPTA requires non-US resident selling real property to pay taxes on profits from the sale If there no profit from the sale, the seller should apply for a refund. Most DVC sellers receive a partial or full refund.
Can I Avoid This Tax
Their are few exceptions. You will very likely need to apply to the state requesting an exception, a Withholding Certificate, Or a refund.
What If I Do Nothing
On closing day, your title Agent is required to withhold 15% of the contract price and send to the Internal Revenue Service. The IRS will hold these fund until you apply for the refund or complete a tax return.
The Best Way(Before closing)
Assuming no income after adjustments. Apply for a withholding certificate using form N-288B. This allow your title agent to forgo sending funds to the state.
The 2nd Best Way(After closing)
The closing agent guidelines are to send 15% of the contract price to the Internal Revenue Service. You will need to apply using form N-288C and wait 3-4 months to receive your refund.
IS THERE MORE TO THIS?
Not really, if you do a google search using the keyword “ firpta “, you will see companies charging from $800 to $2,500 for their services. Of course, they want to show value for their services without sharing their secret souse with just how easy the process really can be.
We have yet to learn of a DVC member selling their membership and paying any taxes based on today’s market prices and allowed deductions. Use our tool to calculate your estimated tax liability. In simple terms, the formula is (Sales price – Original Purchase price – Broker Commission = Net Taxable Income).
We encourage you to read the details. Most sellers learn about this tax while reviewing their closing statement just days before their closing date. By that time, it is too late to apply for a withholding certificate. Then they are forced to complete form N-288C and wait 3-4 months for a refund. For sellers with little or no equity, being out of pocket for these months can be inconvenient.
WHAT FORMS DO I HAVE TO SUBMIT?
Depends on when you submit the forms. If you choose the easy way. Complete form N-288B applying for an Application for Withholding Certificate if you have no net income. If you wait until after your transaction has closed, you will have to complete form N-288C and wait for 3 to 4 months to get your refund.
* Hawaii Residency – If the seller is a Hawaii resident, FIRPTA does not apply. Proof of Hawaii residency is typically a history of filing Hawaii resident tax returns (Hawaii Form N-11). This provision generally covers active-duty military selling a principal residence due to permanent change of station (PCS).
* If the seller occupied the property during the year prior to the sale AND if the sale price does not exceed $300,000 then FIRPTA need
not be withheld.
* 1031 Exchange – DVC FIRPTA withholding is not required, even if the seller’s replacement (purchase) property will be outside of Hawaii.
* Transfer by gift – owner transfers a property to another, for example a parent gifts a house to his/her child.
* Transfers incident to divorce.
When a homeowner who is not a legal resident of the state of Hawaii decides to sell their property, FIRPTA goes into effect to ensure that the state collects taxes it may be due if the property owner had not paid enough general excise or transient taxes while they owned the property. Also, FIRPTA was enacted to provide a means for the state to collect capital gains taxes from absentee owners.
To clarify, it is a withholding “tax” on sales of Hawaii real property by non-resident persons. The “withholding obligation” is generally imposed on the transferee/buyer when a Hawaii real property interest is acquired from a nonresident person. The Hawaii Department of Taxation will want 7.25% of the sale of the property. This withholding serves to collect Hawaii income tax that may be owed by the nonresident person(s).
THIS IS NOT A TAX
It is a withholding similar to a deposit to make sure you file and pay the required Hawaii income, general excise (GE), and transient accommodations taxes (TAT), as applicable. The amount withheld is only a rough estimate. When the selling owner subsequently files a Hawaii tax return, the owner then computes the property tax liability and can then get a refund of any tax previously paid, but that is not owed. FIRPTA is a payment of tax just like wage withholding or estimated taxes would be.
If you have no gain at all on your Hawaii property sale and you are current on your GE and TAT taxes, you might get ALL of the withheld fee (7.25% of the sale of the property) back as a refund. If you do owe capital gains, general excise, and transient accommodations taxes, then it is possible that you might actually owe more tax than the amount withheld.
IS HARPTA THE SAME AS FIRPTA?
As one of the strongest long-term equity growth markets in North America, Hawaii real estate presents a strong option for savvy foreign investors looking for not only a picture-perfect property but also a quantifiable investment. It is critical for foreign Buyers to be familiar with the Foreign Investment in Real Property Tax Act (FIRPTA) – click here to view the IRS FIRPTA page. When a property in the US is sold by a foreign person, then a FIRPTA withholding of 15% of the amount realized is required. If a property was owned jointly by both US persons and foreign nationals, then the amount realized is based on capital contribution of each Seller. As with most things, there are applicable exceptions, such as if the Buyer purchases the property as a primary residence and sales price is less than $300K. For a full list of applicable exceptions, visit the IRS website (click here)
As a side note but worth mentioning, in the State of Hawaii, normally the collection and remittance of HARPTA and FIRPTA are the contractual obligation of the Buyer, as per the Standard Purchase Contract used by our team of Hawaii Realtors. In practice, this is a function executed by the Escrow team to ensure compliance.
For those effectively carrying a 1031 Exchange, withholdings are not applicable. Speak to a Qualified Intermediary or Tax Advisor to confirm and details on how to properly execute.
The above is for information purposes only, it is NOT intended as legal, financial or tax advise – for that, please consult licensed and reputable advisors in said sectors.