FIRPTA and HARPTA and other issues for investorsPosted by Mike Bates on Thursday, June 2nd, 2011 at 10:10am.
What Canadian Buyers Should Know About Buying in Hawaii
Being a Canadian and buying in Hawaii is not a problem. From the purchasing standpoint, if you choose to do your escrow signing in Canada (instead of being in Hawaii), your documents will be notarized at the local consulate, which requires an appointment set in advance.
When you sell, there will be two withholding "taxes" applicable. One is called FIRPTA, a U.S. Federal withholding amounting to 10% of the sale price. The second is HARPTA, a Hawaii withholding of 5% of the sale price. To recap, when you sell, 15% of the sale price will be withheld.
The purpose of the two tax withholdings is to ensure a foreign person files U.S. Federal and Hawaii tax returns and pays capital gains on their sale. Typically, the amounts withheld exceed the actual tax and a seller gets a refund when he files his tax returns.
There are some exemptions from these tax withholdings, however the general rule is that they will be withheld, especially if you sell the property and have a capital gain.
These rules actually apply to all buyers who are not U.S. citizens. The header is titled "Canadian" because of the huge influx of Canadian buyers we've seen in 2010 and 2011. Quite often, one of the first questions is whether there are restrictions on them buying here because they are not U.S. citizens, and the answer is "No - there are no restrictions".
When selling U.S. property, an owner should have either a Social Security Number or an ITIN (Individual Taxpayer ID Number). ITIN's are for people who do not have and are not eligible for a social security number (non-U.S. citizens). Applying for and obtaining an ITIN will be important for selling the property and also if you will use the property for investment purposes (like renting it out). Click here for more info about ITIN's at the IRS website.
Other Things to Know
- Buying property in Hawaii does not automatically make you a citizen of the U.S. or a resident of Hawaii. Might sound like a silly question, however people have asked me.
- If an owner later becomes a U.S. and Hawaii resident and sells the property, the owner will not be subject to FIRPTA or HARPTA withholding.
- If you rent your Hawaii property out, you will be subject to Hawaii and U.S. income taxes for the net rental income.
- With rentals, two other taxes may take effect. General Excise Tax (GET) is collected at 4.5% on Oahu (4% on other islands) based on gross rent received. The owner pays this tax and remits it to the State of Hawaii. The owner can opt to add the tax onto the rent paid by the tenant. Transient Accomodations Tax (TAT), also known as the hotel room tax, is paid at 9.25% of rent colllected. TAT applies ONLY to short term rentals, such as vacation properties and hotel condos. If you own a unit at the Ala Moana Hotel, for example and the unit is in the hotel rental pool, its rental income will be subject to TAT.
- "Strata" are called "condo associations" in the U.S.
Ownership of Agricultural Land
Here's another requirement I just read about recently. Foreign investors who own agricultural land in the U.S. must report their ownership interest to the Department of of Agriculture.
"Foreign owners" includes: foreign individuals; foreign organizations; foreign governments and U.S. organizations with "significant or substantial control" by foreign owners.
Failure to report foreign ownership interests can result in fines of up to 25% of a property's fair market value.
In Hawaii, foreign ownership interests can be reported to:
USDA FSA Hawaii State Office
If you have other questions, just send an e-mail or call me at (808) 548-1220.
Aloha, Mike Bates
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