State of Hawaii, Department of Taxation

Revised April 2021

TAX FACTS 2010-1
Understanding HARPTA
This Tax Facts provides guidance on the withholding of tax on the disposition of Hawaii real property by nonresident persons.
This withholding of tax is commonly referred to as “HARPTA,” which stands for the Hawaii Real Property Tax Act. As used in this Tax
Facts, the person disposing of the real property is referred to as the “seller” and the purchaser of the real property is referred to as the“buyer.” All references to the Internal Revenue Code (IRC) are to the IRC of 1986, as amended. Hawaii conforms to the federal income
tax provisions for the IRC sections referenced in this Tax Facts. References to “husband and wife” are also references to “same-sex
married couples” and “civil union partners.”
The following answers common questions about HARPTA.

1

What is HARPTA?

Under HARPTA (section 235-68, Hawaii Revised
Statutes (HRS)), every buyer is required to withhold and pay to the
Department of Taxation (Department) 7.25% of the amount realizedon the disposition of Hawaii real property. The buyer must pay theamount withheld to the Department using Form N-288, Hawaii
Withholding Tax Return for Dispositions by Nonresident Personsof Hawaii Real Property Interests, and Form N-288A, Statementof Withholding on Dispositions by Nonresident Persons of Hawaii
Real Property Interests.
HARPTA is similar to the federal Foreign Investment inReal Property Tax Act of 1980 (FIRPTA). The intent of HARPTA
is to make sure that nonresident persons comply with Hawaii’s
Income Tax Law.

2

When does HARPTA apply?

HARPTA applies when there is a disposition of Hawaii
real property. A common misperception is that HARPTA does not
apply when the seller is a Hawaii resident. HARPTA does apply
when the seller is a Hawaii resident, but the buyer is not required
to withhold if the seller gives the buyer Form N-289, Certification
for Exemption from the Withholding of Tax on the Disposition of
Hawaii Real Property, stating that the seller is a Hawaii resident. Seequestion 31. If the seller does not give Form N-289 to the buyer, thebuyer is required to withhold, even if the buyer knows that the seller
is a Hawaii resident. If the seller gives Form N-289 to the buyer, but
the buyer knows that it is false, the buyer is required to withhold.
Example 1: Seller is a Hawaii resident but does not believethat he is required to file and pay Hawaii income taxes. Seller enters
into a sales agreement to sell Hawaii real property to his brother,
who knows that Seller is a Hawaii resident. Seller refuses to give
Form N-289 to Buyer. Buyer is required to withhold 7.25% of theamount realized. If Buyer fails to do so, Buyer is liable for theamount that should have been withheld, even though Buyer knowsthat Seller is a Hawaii resident. See question 8.
Example 2: Seller is not a Hawaii resident but gives Form
N-289 to Buyer stating that he is a Hawaii resident. Buyer knows
this is false. Buyer is required to withhold 7.25% of the amountrealized. If Buyer fails to do so, Buyer is liable for the amount thatshould have been withheld.

3

What is real property?

Real property is defined in section 231-1, HRS, as “allland and appurtenances thereof and the buildings, structures, fences,and improvements erected on or affixed to the land, and any fixture
which is erected on or affixed to the land, buildings, structures, fences,and improvements, including all machinery and other mechanicalor other allied equipment and the foundations thereof, whose use isnecessary to the utility of the land, buildings, structures, fences, andimprovements, or whose removal therefrom cannot be accomplishedwithout substantial damage to the land, buildings, structures, fences,and improvements, excluding, however, any growing crops.”
Example 3: Owner purchases a central air conditioner andinstalls the unit in his personal residence. The unit cannot be removed
without substantial damage to the home. The unit is considered tobe part of the real property.
Example 4: Owner purchases a window air conditioner andinstalls the unit in his personal residence. The unit can be removed
without substantial damage to the home. The unit is not considered
to be part of the real property, even if it is being sold as part of thetransaction. See question 19.

Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021

4

Who is a nonresident?

A nonresident is any person other than a resident person.
A resident person is defined as:(1) Individual domiciled in the State or who resides in the Statefor other than a temporary or transitory purpose. Domicile
is the place of the individual’s true, fixed, permanent home.
For more information on domicile and residency, see Tax
Information Release (TIR) No. 97-1, “Determination of
Residence Status;”(2) Corporation incorporated or granted a certificate of authority
under chapter 414, 414D, or 415A, HRS;
(3) Partnership formed or registered under chapter 425 or 425E,
HRS;(4) Foreign partnership qualified to transact business pursuant
to chapter 425 or 425E, HRS;
(5) Limited liability company formed under chapter 428, HRS, or
any foreign limited liability company registered under chapter
428, HRS. If a single member limited liability company has
not elected to be taxed as a corporation, the single member
limited liability company will be disregarded and the solemember is considered the seller;(6) Limited liability partnership formed under chapter 425, HRS;
(7) Foreign limited liability partnership qualified to transact
business under chapter 425, HRS;
(8) Trust where the trustee, or other fiduciary, is a Hawaii resident
or the administration of the trust is carried on in Hawaii; or(9) Estate of a resident decedent where a Hawaii court appoints a
personal representative or administrator and the administrationof the estate is carried on in Hawaii.
A nonresident is a person not domiciled in Hawaii and who
has only a transitory presence in Hawaii, as well as any entity suchas a corporation, partnership, limited liability company, trust or
estate that is not domiciled in Hawaii and which is not qualified totransact business in Hawaii.

5

Is HARPTA a tax?

HARPTA is not a tax. The amount withheld and paid
to the Department by the buyer is an estimated tax payment madefor the seller. The buyer is acting as a withholding agent. When theseller files a Hawaii income tax return to report the sale (and anyother Hawaii income), the amount of any taxes due is reduced by
the amount that was withheld and paid to the Department. If theamount paid is more than the amount of the tax liability, the seller
will receive a refund of the overpaid amount. If the amount paid
is less than the amount of the tax liability, the seller must pay thebalance due.

Page 2

6

How much is withheld?

The buyer is required to withhold 7.25% of the amountrealized on the disposition of Hawaii real property.

7

How can I get a refund?

There are two ways that you can get a refund if the amountwithheld is more than the amount of tax that will be due on the sale.
First, you can get a refund when you file a Hawaii income tax return
after the end of the year.
Second, if the Hawaii income tax return for the year of saleis not yet available, you can apply for a tentative refund by filing
Form N-288C, Application for Tentative Refund of Withholdingon Dispositions by Nonresident Persons of Hawaii Real Property
Interests. For example, you may file Form N-288C if you sold yourhouse in the middle of the year since the income tax return for theyear of sale will not be available until after the end of the year.
Even if you receive a refund by filing Form N-288C, you must still
file a Hawaii income tax return after the end of the year to report
the sale and any other Hawaii income, and to pay any balance dueor request a refund.

8

Who is responsible for withholding under
HARPTA?

The buyer is required to withhold 7.25% of the amountrealized on the disposition of Hawaii real property. If the buyer
fails to do so, the buyer is liable for the amount that should havebeen withheld. See questions 15 and 31.

9

When is the HARPTA payment due?

The buyer must submit Forms N-288 and N-288A withthe withheld amounts to the Department by the 20th day after thetransfer date. Failure to file Forms N-288 and N-288A or to timely
pay the amount due may result in penalties and interest.

10

What is the transfer date?

The transfer date is the date the sale closes and title to theproperty passes from the seller to the buyer.

11

Is the amount realized different from thesales price?

Generally, the amount realized is the sales price of the
Hawaii real property. However, the amount realized also includes
the fair market value of property received (or to be received) by
the seller and the amount of any liability assumed by the buyer orto which the property is subject to immediately before and after
the transfer.
Example 5: Seller and Buyer enter into a sales and purchaseagreement. Buyer purchases Seller’s apartment building for $3,000

Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021
cash plus an assumption of a non-recourse mortgage secured by
the apartment building in the amount of $1,500,000. The amountrealized is $1,503,000.
Example 6: Seller and Buyer enter into a sales and purchaseagreement. Buyer purchases Seller’s home for $100,000 cash. In
addition, Buyer will transfer to Seller free and clear title in Buyer’s
property located in Austin, Texas having a fair market value of$200,000. The amount realized is $300,000.

12What is a disposition?

Generally, a disposition means a sale. However, manyother transactions may also qualify as dispositions, including
exchanges, liquidations, redemptions, gifts, transfers, and capital
contributions. A disposition may occur even if the transaction results
in no current recognition of gain or loss. For more information, seefederal Publication 544, “Sales and Other Dispositions of Assets.”

13

Does HARPTA apply to short sales andforeclosures?

HARPTA applies to all dispositions of Hawaii real
property, regardless of how the disposition occurs. Dispositions
can occur voluntarily through a warranty deed or grant deed (whensold on the open marketplace), by consent (through a short sale),or involuntarily (through a foreclosure).
A short sale occurs when a lien holder and property owneragree to a transaction where the property is sold (whether to thelien holder or to a third party) for a price that is less than theoutstanding mortgage balance. The excess of the mortgage balanceover the sales price may or may not be forgiven depending on theagreement. If some or all of the deficiency is forgiven, the seller may
have cancellation of debt income, depending on the circumstances.
See question 28.
Even though HARPTA applies, there may be no withholding
requirement under a foreclosure or a short sale if the proceeds ofsale are insufficient to pay all costs of the sale and the lien holders
in full. See question 22. The seller must still file a Hawaii income
tax return for the year of disposition.

14

How do I report installment payments
on an agreement of sale?

HARPTA applies to all agreements of sale regardlessof the date of the execution of the agreement. HARPTA must be
withheld on each payment on an agreement of sale the buyer makes
to the seller. The withholding requirement applies only to amounts
attributed to the principal and does not apply to any interest amounts.
Besides withholding a portion of each payment, the buyer
and seller may agree to withhold on the entire amount realized
by the seller (excluding interest amounts) when the agreement ofsale is executed or from the first payment due, or to withhold thePage 3annual amount of the tax from the first payment of each year forthe term of the agreement of sale. The withheld amounts are due tothe Department by the 20th day after payments are made.

15

What if I will not realize a gain on thedisposition of my Hawaii property?

If you will not realize a gain on the disposition of your
Hawaii property, you may file Form N-288B, Application forWithholding Certificate for Dispositions by Nonresident Persons of
Hawaii Real Property Interest, to apply for a withholding certificatethat 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,● Documentation for any capital improvements and otherincreases in basis, and● Documentation showing decreases to basis, including any
deferred gain from any prior sale(s).
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.

16

What kind of documentation is
acceptable?

17

What do you mean by depreciation
allowed or allowable?

The best documentation the seller can provide to the
Department is copies of documents such as original closing
statements, contracts, and purchase orders. For purposes of Form
N-288B and N-288C, oral statements or evidence based upon memory
without further substantiation is not acceptable.

The IRC allows a taxpayer to depreciate any property
having a limited useful life if the property is used in a trade orbusiness. Renting a property for income is a trade or business. For
purposes of calculating gain or loss on the disposition of a trade orbusiness asset, the basis of property is reduced by the depreciation
allowed or allowable, whichever is greater. Depreciation allowed
is depreciation actually deducted and for which a tax benefit wasreceived, unless the claimed amount was reduced by the Department.
Depreciation allowable is depreciation that could have been taken
on your tax return. The basis of the property is reduced by theTax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021
full amount of depreciation allowable even if you did not claim
depreciation that you were entitled to deduct. For more information
on depreciation, see federal Publication 946, “How to Depreciate
Property.”

18

What is a capital improvement?

Capital improvements add value to the property and havea useful life in excess of one year, prolong the property’s life, or
adapts it to new uses. This should not be confused with a repair,which just returns something to its original condition. Capital
improvements can include everything from a new bathroom or deck
to a new water heater or furnace. However, the improvements muststill be evident when you sell the property. For more information,
see federal Publication 551, “Basis of Assets.”
Example 7: In Year 1, Seller purchases a home for his
residence. He replaces the wall-to-wall carpet with new carpeting.
In Year 10, Seller sells the residence. The carpeting is still installed.
The cost of the carpet may be added to the cost of the residence indetermining the amount of any gain.
Example 8: Same facts as Example 7, except that Seller
replaced the carpet in Year 5 with hardwood floors. The cost of the
carpeting is not a capital improvement and does not increase thebasis because it is no longer evident in the home. However, the costof the hardwood floors may be added to the basis.
Example 9: Same facts as Example 8, except that Seller inYear 6 had to repair a portion of the hardwood floor due to a waterleak. The cost of repairing the hardwood floor does not increase
the basis as it was done to maintain the home’s good condition anddoes not add value or prolong its life.

19

Does the cost of furnishings sold withmy home increase the basis of my home?

If the furnishings are removable without incurring
substantial damage to the home, the cost of the furnishings does
not increase the basis of the home. For example, the cost of astand alone refrigerator or drapes cannot be added to the basis of
the home, even though the refrigerator and drapes are included in
the sales contract. A sale of real property and its furnishings arereally two sales: (1) a sale of the real property, and (2) a sale ofthe furnishings. If the seller cannot document the value of thefurnishings and the sales agreement does not apportion the sales
price between the real property and the furnishings, the amount of
the sales price assigned to the furnishings is zero. If the furnishings
were not used in a trade or business, any loss from the sale of thefurnishings is a personal loss and is not deductible. See federal
Publication 523, “Selling Your Home.”
Example 10: In year 1, Seller buys a condominium for her
personal summer residence. She purchases new appliances, including
a washer, dryer, range, refrigerator, and air conditioner. These may

Page 4be removed without damaging the condominium. In Year 5, Seller
sells the condominium, including the appliances. The cost of theappliances does not increase the basis in the condominium, andthe amount of the sales price assigned to the appliances is zero.
Seller may have a loss on the sale of the appliances, but the loss
is personal and does not reduce the amount of gain on the sale ofthe condominium.
Example 11: In year 1, Seller buys a condominium for her
personal summer residence. She also purchases a Picasso painting for$500,000 to display in the residence. The painting may be removed
without damaging the condominium. In Year 5, Seller sells thecondominium, including the Picasso. The sales agreement establishes
a value of $1 million for the Picasso, which is corroborated byexpert appraisals. The cost of the Picasso does not increase thebasis in the condominium. However, the portion of the sales priceassigned to the Picasso is not included in determining the amountthat is required to be withheld. There are two sales agreements: onefor the sale of the real property and one for the sale of the Picasso.
HARPTA applies to the sale of the real property, but not to the saleof the Picasso. Seller must still file a Hawaii income tax return forthe year of disposition to report the sale of the condominium and
the Picasso painting, and any other Hawaii income.

20

As the surviving spouse who is a residentof a community property state, can I
claim a stepped-up basis under IRC
section 1014(b)(6) for my one-halfinterest in the property?

Generally, you may not take a stepped-up basis for yourone-half interest in the property. However, Hawaii has enacted the
Uniform Disposition of Community Property Rights at Death Act(“UDCPRDA”), which is found in Chapter 510, HRS. UDCPRDA
generally preserves the community property nature of the property,
unless the couple has taken some action to sever community property
rights.
With respect to real property located in Hawaii andpurchased by the married couple while residing in a community
property state, UDCPRDA, section 510-22, HRS, establishes arebuttable presumption that such real property, and whose title
to the real property in Hawaii is taken in a form which createdrights of survivorship, is presumed not to be community property.
Because this presumption is rebuttable, it may be overcome byclear and convincing evidence that the married couple intended
such property to be community property. For instance, the deed
may say that title is held “jointly, with rights of survivorship, andintended to be community property.” Other written documentation,
contemporaneously executed at the time of the purchase of the real
property, may also be acceptable. For example, the Deposit Receipt
Offer Acceptance (DROA) for the purchase of the property may

Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021
state that title will be held “jointly, with rights of survivorship, andintended to be community property.” If the rebuttable presumption
can be overcome with such clear and convincing evidence, andprovided that at least one-half of the entire community interest is
included in the deceased spouse’s gross estate, the surviving spouse’sinterest is treated as property acquired from the deceased spouse andtherefore there is a full basis step-up due to the unlimited marital
deduction of IRC section 2056. The treatment for income tax must,however, match the treatment for the estate tax.
If such written documentation does not exist, however, thepresumption of section 510-22, HRS, applies, such that the property
is not held as community property and the basis for the real property
is one-half of the cost of the real property plus one-half of the fairmarket of the real property at the date of death (or, if applicable,
one-half of the value of the property determined using the alternative
valuation date).
Example 12: Married taxpayers purchase a residence
while residing in Hawaii. They subsequently move to California,
a community property state. After several years, Spouse dies
unexpectedly, and the Surviving Spouse decides to sell the Hawaii
residence. Surviving Spouse may not claim a full step up in basis,
since the property was not purchased during a time in which thecommunity property laws of California apply.
Example 13: Married taxpayers reside in Texas, a community
property state, and decide to purchase a winter residence in Hawaii.
In purchasing the property, the taxpayers in the DROA specified thatthey intend to hold the property as community property. The broker
representing them informed them, however, that title to the property
could not be held as such since Hawaii is not a community property
state. They therefore hold the property as joint tenants with a rightof survivorship. After several years, Spouse dies unexpectedly, andthe Surviving Spouse decides to sell the Hawaii winter residence.
At least one half of the value of the winter residence was includedin the Hawaii estate tax return. The surviving spouse is entitled to afull step up in basis under UDCPRDA since the Surviving Spousehas overcome its presumption by producing the original DROA.
Example 14: Married taxpayers reside in a community
property state whose laws provide that, unless shown to the contrary,
any property acquired using community property funds is considered
community property. The taxpayers sell a piece of community
property real estate and use those funds to purchase a summer homein Hawaii. After several years, Spouse dies unexpectedly, and theSurviving Spouse decides to sell the Hawaii winter residence. At
least one half of the value of the summer residence was includedin the Hawaii estate tax return. The surviving spouse is entitled toa full step up in basis as the presumption that the parties intend to
hold the property as community property applies.

Page 5

21

Does Hawaii conform to IRC section
121?

Hawaii conforms to IRC section 121, which allows aseller to exclude up to $250,000 ($500,000 if married and filing a
joint return) of the gain on the sale of the seller’s principal residence.
The exclusion applies if all of the following are true:(1) The seller owned the home for at least two years during thefive-year period ending on the date of the sale;(2) The seller lived in the home as a principal residence for atleast two of the years the seller owned the home during thefive-year period ending on the date of the sale. The two yearsof residence can fall anywhere within the 5-year period. It
does not have to be continuous. The two years may consistof 24 months or 730 days. A vacation or other short absence
counts as time lived in the home;(3) The seller did not acquire the home through a like-kindexchange (1031 exchange) during the past five years; and(4) The seller did not exclude gain on another home sold during
the two years before the current sale.
The $500,000 exclusion applies only if all of the following
are true: (1) the taxpayers are married and file a joint return forthe year of sale, (2) either the taxpayer or the taxpayer’s spousemeets the ownership requirement, (3) both the taxpayer and thetaxpayer’s spouse meet the residence requirement, and (4) neither
the taxpayer nor the taxpayer’s spouse excluded gain on another
home sold during the two years before the current sale.
A seller who does not qualify for the $250,000 or $500,000
exclusion may qualify for a partial exclusion if the sale of the homeis due to (1) a change in the seller’s workplace location, (2) healthissues, or (3) an unforeseeable event. See federal Publication 523,
“Selling Your Home,” for more information.
A seller who wants to eliminate the amount of withholding
required because of the gain exclusion must file Form N-288B alongwith required documentation. If any amount of gain remains
after applying the exclusion, Form N-288B cannot be used. The
buyer is required to withhold the full 7.25% of the amount realized.
Even if a withholding certificate is issued, the seller must still filea Hawaii income tax return for the year of disposition.
Example 15: Husband and Wife purchase a home in 1957. In
2018, Husband and Wife decide to retire in Arizona and permanently
move there. Because of conditions in the real estate market, theydecided not to sell their home immediately and left it vacant incare of relatives. In Year 2020, they sold their home after market
conditions had improved. The sales price was $600,000 and the basis
in the home at the time of sale was $100,000. They are married at
the time of sale and have not previously had gain excluded fromthe sale of a principal residence. Because Husband and Wife areTax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021

Page 6entitled to the IRC section 121 exclusion, the amount required to
be withheld under HARPTA may be eliminated if they provide thebuyer an approved Form N-288B. Husband and Wife must still filea Hawaii income tax return for the year 2020.

● Trust company,

22● Subsidiary of a financial holding company, orWhat if I have insufficient funds fromthe sale to pay all my outstanding
mortgages and the costs of sale?

If you will have insufficient proceeds from the sale to pay
the withholding in full, you may file Form N-288B to apply for awithholding certificate that reduces or eliminates the amount to be
withheld by the buyer. You must submit supporting documentationsuch as a tentative closing statement. You must file Form N-288B
with the Department at least 10 working days prior to the date oftransfer or it will not be approved. Even if a withholding certificate
is granted by the Department based upon insufficient proceeds, youmust still file a Hawaii income tax return for the year of disposition.

23

Can a commissioner appointed by the
court to sell a house in foreclosure
submit a Form N-288B?

A commissioner or other duly appointed fiduciary,acting within the scope of the commissioner’s authority, has thepower to submit a Form N-288B showing that the proceeds ofsale are insufficient to pay the costs of sale and all liens and otherencumbrances, provided that the commissioner has personal
knowledge of the situation. A commissioner in a foreclosure orsimilar sale is an agent for the seller. However, the commissioner’s
authority is limited to selling the property and the acts associatedwith such sale. A commissioner does not have the authority to file
Form N-288C seeking a tentative refund. A commissioner appointed
to act on behalf of the seller is not the owner of the real property
being sold and title to the property does not transfer from the seller
to the commissioner when the commissioner is appointed by the
court. The seller remains the owner of the property until it is sold,and must file a Hawaii income tax return to report the sale and anyother Hawaii income, and to pay any tax due.

24

Am I required to withhold if a lendersells me property?

You are not required to withhold if the lender is one of thefollowing and is subject to the franchise tax under chapter 241, HRS:
● Bank,● Building and loan association,● Financial services loan company,● Financial corporation,● Small business investment company,● Mortgage loan company,● Financial holding company,● Development company.
Section 235-9, HRS, provides that these entities are nottaxable under Hawaii’s Income Tax Law. Therefore, the HARPTA
withholding does not apply to these entities since the withholding is
an income tax provision. These entities are not required to provide
you with a Form N-288B or Form N-289.

25

Am I required to withhold if a government
agency sells me property?

26

Can an escrow company apply for arefund of the withholding?

You are not required to withhold if the seller is agovernment agency. Federal (including Fannie Mae and Ginnie
Mae), state, municipal, and county government agencies are
not considered taxable entities for Hawaii income tax purposes.
Therefore, the HARPTA withholding does not apply to government
agencies. Government agencies are not required to provide youwith a Form N-288B or Form N-289.

No. The escrow company cannot apply for a refund of
the withholding even if the escrow company made an error and paid
a withholding amount to the Department when withholding was
not required. As noted in question 5, a HARPTA payment madeto the Department is an estimated tax payment and credited to theseller’s account. Once payment is made to the Department, only theseller can request a refund of the amount withheld. The seller canapply for a tentative refund by filing Form N-288C. See question
7. The Department cannot process a refund request submitted byany other party, including the escrow company.

27

Do I owe taxes if the amount of mysecured indebtedness exceeds the sales
price?

Even if your secured indebtedness exceeds the sales price,
you would owe taxes if you have a taxable gain. Many taxpayers
mistakenly use “gain” and “equity” interchangeably. However, theseconcepts are different. Gain is the excess of net sales proceeds over
the adjusted basis of the property being transferred, and is the baseupon which capital gains tax is calculated. Equity is the amount ofvalue remaining after paying off all mortgages and any other liens
encumbering the property. You could have a taxable gain even if
you have no equity in the property. This commonly occurs whenproperties are refinanced or equity lines of credit are taken out, but

Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021
no capital improvements are made to the property. Under certain
conditions, a cancellation of debt may also result in taxable income.
Example 16: Taxpayer purchases a condominium forinvestment and rents it out. The purchase price was $100,000. Three
years after purchasing the property, the value of the condominium
has increased to $400,000. Taxpayer refinances the property byencumbering the property with a new first mortgage of $300,000.
Taxpayer uses the proceeds of the new loan to pay off the original
first mortgage and to pay for personal expenses unrelated to thecondominium. Five years later, Taxpayer sells the condominium
for $300,000. At that time, the mortgage balance is $295,000, costs
associated with the sale is $15,000, and depreciation allowed or
allowable is $18,182. Taxpayer made no other improvements tothe condominium. Taxpayer has no equity in the property, but does
have a capital gain as follows:
Sales price		
$300,000Cost of sale		(15,000)
Adjusted sales price		
$285,000
Basis:
Original cost$100,000
Depreciation	 (18,182)(81,818)
	   Gain on sale		$203,182
The seller is required to file a Hawaii income tax return forthe year of sale and to pay the tax due, even though the seller did
not receive any proceeds of the sale. HARPTA still applies, so thebuyer is required to withhold, unless the seller gives the buyer anapproved Form N-288B due to insufficient proceeds.

28

What is cancellation of debt income?

If you borrow money and the lender later cancels or
forgives the debt, you may have to include the cancelled amountin income for tax purposes, depending on the circumstances. When
you borrowed the money, you were not required to include the loan
proceeds in income because you had an obligation to repay thelender. When that obligation is subsequently forgiven, the amount
you received as loan proceeds is reportable as income because you
no longer have an obligation to repay the lender. The lender is usuallyrequired to report the amount of the canceled debt to you and the
IRS on Form 1099-C, Cancellation of Debt. For more information,
see federal Publication 4681, “Canceled Debts, Foreclosures,
Repossessions, and Abandonments.”
Example 17: Taxpayer purchases a condominium for
Taxpayer’s principal residence for $300,000, paying $15,000 down
and the balance through a new first mortgage loan of $285,000. The
loan is recourse, meaning that Taxpayer is personally liable for the
mortgage. When the remaining balance of the loan is $280,000,
Taxpayer defaults on the loan. The lender accepts Taxpayer’s

Page 7

voluntary conveyance of the condominium in exchange for cancelingthe loan. Similar condominiums are selling for $230,000 at the time
the conveyance to the lender is executed.
The taxpayer may have cancellation of debt income of$50,000 (the outstanding amount of the debt ($280,000) less thefair market value of the property surrendered ($230,000) when theloan is forgiven. In addition, the transaction is a disposition andis treated as a sale. Taxpayer has a loss of $70,000 (fair market
value of $230,000 minus the adjusted basis of $300,000), which
is nondeductible because it is a personal loss.

29

Is cancellation of debt income always
taxable?

Certain situations may reduce or eliminate the taxable
amount on the cancellation of debt income. Common situations
when cancellation of debt income is not taxable are:● Bankruptcy: Debts discharged through bankruptcy are notconsidered taxable income.
● Insolvency: If you are insolvent when the debt is cancelled,some or all of the cancelled debt may not be taxable to you.
You are insolvent when your total debts are more than thefair market value of your total assets. Insolvency can be fairly
complex to determine and the assistance of a tax professional
is recommended if you believe you qualify for this exception.
In addition, IRC section 108 provides relief from cancellationof debt income for certain homeowner-occupants until December
31, 2017. It is limited to debts of $2 million or less and does not
apply to rental properties or other non-primary residences. It also
applies only to forgiven or cancelled debt used to buy, build or
substantially improve the principal residence, or to refinance debt
incurred for those purposes. Refinanced debt qualifies for thisexclusion, but only up to the extent that the principal balance ofthe old mortgage, immediately before the refinancing, would havequalified. It is important to note that cancellation of debt income istreated as ordinary income and not as capital gains.

30

What if I have a non-recourse loan?

A non-recourse loan is a loan for which the lender’s only
remedy in case of default is to repossess the property being financed
or used as collateral. The lender cannot pursue you personally incase of default. Because sellers that are not personally liable for adebt realize an amount that includes the full amount of the canceled
debt, even if the value of the property that is security for the debt isless, there is generally no cancellation of debt income.
Example 18: Taxpayer purchases a condominium for
Taxpayer’s principal residence for $300,000, paying $15,000 down
and the balance through a new first mortgage loan of $285,000.

Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov

Tax Facts 2010-1
Revised April 2021

Page 8The loan is non-recourse, meaning that Taxpayer is not personallyliable for the mortgage. When the remaining balance of the loan
is $280,000, Taxpayer defaults on the loan. The lender accepts
Taxpayer’s voluntary conveyance of the condominium in exchange
for canceling the loan. Similar condominiums are selling at $230,000
at the time the conveyance to the lender is executed.
There is no cancellation of debt income even though the fairmarket value of the property surrendered is less than the loan forgiven
because the loan was non-recourse. The transaction is a disposition
and is treated as a sale. The amount received is the amount of thecancelled debt. Taxpayer has a loss of $20,000 (amount received
through cancellation of debt of $280,000 minus the adjusted basisof $300,000), which is nondeductible because it is a personal loss.

31

Are there any exceptions to thewithholding requirements?

Yes. Withholding is not required if the seller gives tothe buyer Form N-289 stating the seller’s taxpayer identification
number and:
(1) The seller is a Hawaii resident person;(2) That by reason of a nonrecognition provision of the IRC(which Hawaii conforms to), or the provisions of any UnitedStates treaty, the seller is not required to recognize any gainor loss with respect to the transfer. The seller must provide
a description of the transfer and a summary of the law andfacts which support the claim of nonrecognition; or(3) For the year preceding the date of the transfer, the property
has been used by the seller as a principal residence and theamount realized for the property does not exceed $300,000.
Note: This differs from FIRPTA, which exempts a transaction
if the buyer purchases real estate which will be used as thebuyer’s principal residence and the amount realized is not
more than $300,000.

32What are some of the nonrecognitionof gain or loss provisions that Hawaii
conforms to?
Common nonrecognition provisions include:● IRC section 1031 “like-kind” exchange,● Transfers by gift,● Transfers by bequest, and● Transfers incident to divorce.
In all these instances the seller must still give the buyer
Form N-289.
The most common nonrecognition provision in real estate is
the IRC section 1031 exchange, which allows the seller to reduce orto defer capital gains taxes on the sale of investment real estate when
it is exchanged for other investment real estate within a prescribedperiod of time. The seller does not need to replace the property
with another property in Hawaii. If you receive cash, property
that is not like-kind, or are relieved of debt, some taxable gain
may be recognized in the year of the exchange. There can also beboth deferred and recognized gain in the same transaction when ataxpayer exchanges property for like-kind property of lesser value.
If any amount of gain is recognized in an IRC section 1031
exchange, Form N-289 cannot be used to obtain an exemption
from the withholding.
Example 19: Investor purchases an apartment building for$250,000. Five years later, in a qualified IRC section 1031 transaction,
Investor exchanges the apartment building for another apartmentbuilding worth $400,000 and stock worth $50,000. Although a
portion of the transaction qualifies for deferral of gain, the receiptof the stock causes an immediate recognition of gain up to the valueof the stock. Form N-289 cannot be used to obtain an exemption
from the withholding. The buyer is required to withhold the full
7.25% of the amount realized, which includes the value of thestock received.

33

Where can I get additional information
on HARPTA?

For additional information on HARPTA, see TIR 2017-01,“Withholding of State Income Taxes on the Disposition of Hawaii
Real Property,” or call the Department’s technical section at 808587-1577. Forms and publications referenced in this Tax Facts areavailable on our website at tax.hawaii.gov. Forms and publications
can be mailed to you by calling 808-587-4242 or toll-free at 1-800222-3229.

Where to Get Forms and Information
Website: tax.hawaii.gov
Telephone: 808-587-4242
Toll-Free: 1-800-222-3229
Telephone for the hearing impaired: 808-587-1418
Toll-Free for the hearing impaired: 1-800-887-8974
Tax Facts is a publication that provides general information on tax subjects of current interest to taxpayers and is not a substitute for legal or other professional
advice. The information provided in this publication does not cover every situation and is not intended to replace the law or change its meaning. Furthermore, theinformation in this publication is subject to change without notice due to changes in the law or rules, judicial decisions, or changes in official Department positions.

For more information, visit the Department of Taxation’s website at tax.hawaii.gov