HARPTA and FIRPTA: What Every Non-Resident Seller of Maui Real Estate Needs to Know

I had a client recently -- a Georgia resident -- who sold a condo on Maui. She sold it at a loss. Not a gain. A loss. And we still had to file an exemption with the state before closing to prevent Hawaii from withholding 7.25 percent of her entire sales price from her closing proceeds.

If we had not caught that and filed the paperwork in time, the state would have held those funds. Getting them back would have taken weeks, possibly months, and would have required additional filings she was not prepared for.

That is HARPTA in real life. And it surprises sellers constantly -- including sellers who think they are in the clear because they did not make money on the deal.

Here is what you need to understand before you sell.

What HARPTA Is

HARPTA stands for the Hawaii Real Property Tax Act. It is not a tax itself. It is a withholding mechanism -- the state's way of making sure it can collect capital gains tax from sellers who do not live in Hawaii and might not otherwise file a Hawaii tax return after the sale.

If you are not a Hawaii resident on the date you close, HARPTA applies to you. That means mainland U.S. sellers, Canadian buyers who later sell, military members who maintain residency in another state, and former Hawaii residents who have since moved away.

The withholding amount is 7.25 percent of the gross sales price. Not your profit. The full sales price.

On a $1,000,000 sale that means $72,500 withheld from your closing proceeds before you see a dollar. On an $800,000 sale it is $58,000. The withholding is based on the sales price because Hawaii's capital gains tax rate is 7.25 percent -- the logic being that the state withholds an estimate of what you might owe and reconciles it later.

The problem is that the withholding almost always far exceeds the actual tax liability. And if you are selling at a loss, your actual tax liability is zero -- but the state will still withhold unless you file the right paperwork before closing.

What FIRPTA Is

FIRPTA is the federal equivalent -- the Foreign Investment in Real Property Tax Act. It applies to non-U.S. citizens and foreign nationals selling U.S. real estate.

If you are a Canadian citizen who owns a Maui condo, FIRPTA applies to you on top of HARPTA. The federal withholding rate under FIRPTA is 15 percent of the gross sales price.

That means a Canadian seller closing a $1,000,000 sale could face $72,500 withheld by the state under HARPTA and $150,000 withheld by the federal government under FIRPTA -- a combined $222,500 held from closing proceeds pending tax filings and reconciliation.

That is not a theoretical number. That is what happens at the closing table if the exemptions are not filed correctly and in advance.

Like HARPTA, FIRPTA withholding is not a final tax. It is an estimate. If the actual tax liability is lower -- which it usually is -- sellers can apply for a refund. But the process takes time and requires proper documentation.

The Forms You Need to Know

This is where most sellers get confused. There are several different forms depending on your situation, and the deadlines matter.

Form N-289 is the exemption form for sellers who qualify to avoid HARPTA withholding entirely. Common qualifying situations include Hawaii residents, sellers doing a 1031 exchange, and sellers whose property was their primary residence in the prior year with a sales price under $300,000. Escrow will provide this form after the contract is signed.

Form N-288B is the form to apply for a reduction or elimination of HARPTA withholding when you do not qualify for an N-289 exemption but can demonstrate that your actual tax liability is lower than the full 7.25 percent withholding. This is the form my Georgia client needed. She was selling at a loss, so her actual tax liability was zero -- but she had to prove that to the state and get the N-288B approved before closing. The state requires this application at least ten business days before the closing date. Do not wait.

Form N-288C is a post-closing refund application if the full withholding was collected and you believe you are owed money back. Refunds typically take four to eight weeks but can take up to sixteen weeks.

For FIRPTA, foreign sellers work through the IRS process separately, with the buyer contractually responsible for withholding and remitting the funds under Hawaii's standard purchase contract.

The Canadian Buyer Situation

Canada is one of the largest sources of foreign real estate buyers in Hawaii, and many Canadian owners are not fully aware of what a future sale will trigger.

When a Canadian citizen sells Hawaii real estate, both HARPTA and FIRPTA apply simultaneously. The combined withholding exposure can be significant. At a $1,000,000 sales price, that is $222,500 held from closing proceeds.

The good news is that exemptions and reductions are available under both programs if the paperwork is filed correctly and on time. The bad news is that the process requires a tax professional familiar with both Hawaii state tax law and U.S.-Canada tax treaty provisions. This is not a DIY situation.

If you are a Canadian who owns property on Maui and you are thinking about selling at any point, start the conversation with a Hawaii tax professional well before you list. The timeline for exemption filings is strict and rushing it creates risk.

What This Means for You as a Seller

A few things worth remembering regardless of where you live:

HARPTA applies to you if Hawaii is not your primary state of residence on the date of closing. It does not matter if you have owned the property for twenty years, paid taxes every year, or are selling at a loss.

The withholding is based on the sales price, not your gain. At Maui's price levels, that number gets large quickly.

Exemptions are real and available, but they require timely filing. The ten-business-day deadline for an N-288B is not flexible. Missing it means the withholding happens and you are in refund territory, which takes time.

Your escrow company will provide the standard forms, but they are not tax advisors. For anything beyond a straightforward exemption, work with a Hawaii tax professional or CPA who handles real estate transactions. The cost of that advice is minor relative to what is at stake.

If you are doing a 1031 exchange, HARPTA withholding can generally be avoided -- but the exchange must be properly structured and documented before closing.

A Simple Summary

HARPTA: Hawaii state withholding of 7.25 percent of the gross sales price for any non-Hawaii resident seller. Applies to U.S. mainland sellers, Canadians, military, and former residents.

FIRPTA: Federal withholding of 15 percent of the gross sales price for foreign national sellers. Applies on top of HARPTA for Canadian and other foreign sellers.

Both are withholdings, not final taxes. Both can be reduced or eliminated with proper and timely filings. Both can create significant cash flow disruption at closing if not handled correctly.

The time to understand this is before you list -- not the week before closing.

If you are a non-resident thinking about selling Maui real estate and you want to understand how this affects your transaction, I am happy to walk through the basics with you and connect you with the right professionals for the tax-specific questions.

Mino McLean Island Sotheby's International Realty mauimino.com