FREQUESTLY ASKED QUESTIONS ABOUT FIRPTA
WHAT IS FIRPTA?
FIRPTA is an acronym for the Hawaii Real Property Tax Law. FIRPTA is a law, not a tax, a common misunderstanding. The Hawaii law is similar to laws passed by other states (e.g., California) as well as a federal law that applies to non-U.S. citizens. Under FIRPTA, an estimate of an owner’s capital gains tax that will be due in Hawaii is withheld at closing. Prior to the passage of FIRPTA, the state had no means of collecting such taxes unless the absentee owner filed a Hawaii income tax return for the year of the sale. NOTE: Some absentee owners may be exempt from the FIRPTA law. However, the fact that an owner may be exempt from the FIRPTA law does not also exempt the owner from paying state capital gains taxes that may be due in Hawaii.
WHAT IF THERE ARE INSUFFICIENT PROCEEDS FROM THE SALE TO PAY THE WITHHOLDING OR IF THERE IS A LOSS ON THE SALE RATHER THAN A GAIN?
The withholding may not be required if there are insufficient proceeds from the sale or if there has been a capital loss rather than a capital gain. When either of these occurs, escrow will not close the transaction until a Hawaii form N-288B has been approved by the state (unless the seller agrees to pay the withholding). If the sale creates a capital loss or the proceeds available are insufficient, the owner must submit appropriate paperwork to the state. This paperwork must include (as applicable): (a) a copy of the closing statement when the property was purchased; (b) documentation showing depreciation that has been claimed; (c) documentation for any capital improvements; (d) documentation for deferred gain from any prior sale(s) that adjusted the owner’s buying basis; and (e), an estimated closing statement prepared by escrow. NOTE: To allow time for approval, form N-288B must be submitted to the state at least ten business days prior to closing. Since an estimated closing statement prepared by escrow has to accompany form N-288B, it is usually submitted relatively late during the escrow process. If form N-288B is rejected by the state, there is usually insufficient time to submit a revised form and still meet the scheduled closing date. NOTE: Most absentee owners should have a CPA or professional tax advisor prepare their N288B form to document a capital loss. It is relatively common for the state to reject applications because of insufficient documentation. We have had absentee owners agree to pay the withholding when there was no gain merely to be able to close their transactions as scheduled. The owners were reimbursed after the sale: however, they could have avoided any withholding had they submitted a better package. NOTE: The state may adjust the withholding to a lesser amount if there is a gain but insufficient proceeds available to pay 7.25% of the sales price. NOTE: Form N-288B 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 a penalty/interest in order to have form N-288B be approved.
HOW MUCH IS COLLECTED UNDER THE FIRPTA LAW?
The amount collected under the FIRPTA law is 7.25% of the sales price.
HOW MUCH IS OWED IN HAWAII CAPITAL GAINS TAX?
The Hawaii capital gains tax on real estate is 7.25%. This applies to all four factors of gain, refer below for a discussion of the four factors. The difference between how much is withheld and how much is owed is the amount of your refund. The state of Hawaii will keep your money if you do not submit the appropriate refund requests.
IF THE COLLECTED AMOUNT IS TOO LARGE, HOW DO YOU OBTAIN A REFUND?
If the 7.25% of sales price withholding is too large, the owner files a Hawaii form N-288C after closing. If the appropriate Hawaii income tax return (ex: form N-15) for the year is available, then the owner should file the appropriate tax return instead of filing form N-288C. The state will reject form N-288C if form N-15 is available. Hawaii has no provision for filing a form prior to closing so the correct amount will be withheld.
HOW DOES AN OWNER OBTAIN THE FIRPTA FORMS?
The forms can be obtained from the state. Select “Forms” from Hawaii.gov/tax and go to the “Alphabetical List”. Select “N” and scroll to the applicable form. The forms can be downloaded from the state website here.
WHAT DEFINES A NONRESIDENT?
A nonresident owner for purposes of FIRPTA is an owner who does not file a Hawaii resident tax return.
AN IRC 1031 TAX-DEFERRED 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 selling.
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.
HOW IS FIRPTA ENFORCED?
FIRPTA has the buyer responsible for paying the withholding if appropriate documentation is not provided by the seller. Therefore, escrow will automatically withhold 7.25% of the sales price unless the seller can document that no such withholding i
Who pays real estate transfer tax in Hawaii?
The excrow company will collect the funds from the seller and remitt to the state.
What is the new capital gains tax in Hawaii?
Hawaii taxes capital gains at a lower rate than ordinary income. The highest rate reaches 7.25%.
Who is responsible for FIRPTA withholding in Hawaii?
Under the Hawaii withholding requirement, the buyer or transferee of any Hawaii real estate is required to (i) withhold and deduct a tax equal to 5% of the amount realized by the seller or transferor upon the disposition of the property and (ii) file Forms N-288 and N-288A to report and transmit the amount withheld to
What is form N-288A in Hawaii?
THIS FORM IS TO BE USED FOR TRANSFERS OR PAYMENTS MADE IN 2023 ONLY. they transferred their Hawaii real property interest. Attach Copy A of Form(s) N-288A and your check or money order to Form N-288.
How do I get a refund from FIRPTA?
File a Form N-288B (with Form N-103 included if applicable) in a timely manner prior to closing to avoid FIRPTA withholding altogether if you qualify. Or, maybe you qualify for an N-289 exemption? Alternatively, you may need to file a Form N-288C to get your money back… if you don’t qualify for an exemption.
What is Form N 288C?
Form N-288C to apply for a refund of the amount withheld on dispositions by nonresident persons of Hawaii real property interests which is in excess of the transferor/ seller’s tax liability for the transaction.
What is the N 289 exemption?
Once a home seller accepts an offer and goes into contract (also known as entering the escrow process), they are usually given a Form N-289. This is a Hawaii form, and the purpose of this is to claim an immediate exemption of the FIRPTA withholding by making one of the 3 claims: The home seller is a “Hawaii resident”
Who is subject to FIRPTA?
Put simply, any non-Hawaii resident selling real property in the state must do so. Therefore, U.S. residents and foreign nationals alike are subject to FIRPTA withholdings.
What is the FIRPTA tax refund in Hawaii?
FIRPTA is a payment of tax just like wage witholding 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 witheld fee (7.25% of the sale of the property) back as a refund.
How do I avoid paying FIRPTA?
File a Form N-288B (with Form N-103 included if applicable) in a timely manner prior to closing to avoid FIRPTA withholding altogether if you qualify. Or, maybe you qualify for an N-289 exemption? Alternatively, you may need to file a Form N-288C to get your money back… if you don’t qualify for an exemption.
Where do I put FIRPTA on my tax return?
The FIRPTA withheld is considered to be an “estimated tax payment”. If you did not file for an early FIRPTA refund, report the full amount of the withholding from Form N-288A on your tax return.
WHEN IS THE FIRPTA PAYMENT DUE?
The buyer must submit the proper forms and withheld amounts to the Department not more than twenty days following the transfer date (the date on which the sale closes and title to the property passes from the seller to the buyer). Failure to file the return or to timely pay the amount due may result in the imposition of penalties and/or interest.
What if I will not realize a gain on the disposition of my Hawaii property?
File Form N-288B, Application for Withholding Certificate for Dispositions by Nonresident Persons of Hawaii Real Property Interest, to apply for a withholding certificate that eliminates the amount to be withheld by the buyer. You must submit supporting documentation to show that there will be no gain realized. Such documentation may include:
● Closing statement when the property was purchased showing the purchase price,
● Documentation showing the depreciation allowed or allowable, if any,
You must file Form N-288B with the Department at least 10 working days prior to the date of transfer or it will not be approved. Even if a withholding certificate is granted by the Department because there is no gain realized on the disposition, you must still file a Hawaii income tax return for the year of disposition.
What if I have insufficient funds from the sale to pay all my outstanding mortgages and the costs of sale?
File Form N-288B within 10 days prior to the scheduled closing date to apply for a withholding certificate that reduces or eliminates the amount to be withheld by the buyer.
Can an escrow company apply for a refund of the withholding?
No. The escrow company cannot apply for a refund. The Department cannot process a refund request submitted by any other party, including the escrow company. Once payment is made to the Department, only the seller can request a refund of the amount withheld. The seller can apply for a tentative refund by filing Form N-288C.
Are there any exceptions to the withholding requirements?
Yes. The seller is a Hawaii resident person.
Where can I get additional information on FIRPTA?
Call the Department’s technical section at 808- 587-1577. Forms and publications referenced in this Tax Facts are available on our website at tax.hawaii.gov. Forms and publications can be mailed to you by calling 808-587-4242 or toll-free at 1-800- 222-3229.
For more information visit DVC FIRPTA