 Welcome to Inside Hawaii Real Estate. I'm your host, Will Tanaka. I'm a full-time realtor and former Hawaii Real Estate Litigation Attorney. And, you know, I love today's topic because it affects a significant number of sellers in Hawaii. So we're going to talk about HAPTA and FERPTA. You're asking, what is that? Well, this show is going to be for you if you own real property in Hawaii. It's your second home or it's your investment property and you live off island. You're military. You're a trustee who lives on the mainland. You're a foreigner. You have a mainland LLC who owns property in Hawaii. So it's going to affect a lot of people and it's going to be jam-packed. So what time is it? It's show time, baby. And today we have a very special guest, Brad Konishi, CPA. Welcome, Brad. Hey, thank you so much for having me, Will. You know what? I haven't had a chance to do this show before and so I'm looking forward to it. Thank you. Oh, I'm so excited. So just to give everyone a background about Brad, I mean, he is my go-to person when it comes to taxes about HAPTA and FERPTA and real estate transactions. So he's a licensed CPA since 2001. He's an instructor of residential real estate tax rules, 1031 exchanges and foreign sellers. He's a financial auditor. He was with PricewaterhouseCoopers, a controller for HBR, Honolulu Border Realtors. And he's the current owner of BradKCPA LLC, which is an accounting firm specializing in assisting realtors and their clients, just like you viewers. And he's also the president of HAPTA Help LLC. Ooh, that is a lot of experience, Brad. It sure does and it makes me feel old just reading that off. But yeah, just the company that we're focused on now, that I'm focused on now is HAPTA Help. What we do is we help home sellers who are dealing with issues of HAPTA and FERPTA. And like you said, this is something that occurs for quite a number of sellers who are selling real property in Hawaii. Got it, got it. Okay, well, let's get started because this is always a hot topic. And oftentimes, it might be a surprise for the sellers if they're like, oh, we have to pay HAPTA, but what is that? I've never heard of it. Yeah, let's talk a little bit about that. HAPTA is actually an acronym and it stands for the Hawaii Real Property Tax Act. It's a rule that went into effect, I believe it was probably in the late 80s or early 90s. And the reason why it was put into effect is that the Hawaii noticed that there were some substantial gains that were happening in the Hawaii real estate market then. You know, very similar to what we've been experiencing for the last several years. But what was happening at that time was mainland and foreign investors were taking their proceeds and they were disappearing without paying Hawaii income taxes. So, you know, this is a way for Hawaii to protect themselves, to make sure that, you know, there's some sort of withholding on the sale to make sure that all taxes are gonna be covered by the seller. So it's just something like a security deposit of sorts. I see. So for example, like if I own the investment property, I live in Hawaii. When I sell it and there's capital gains, of course, I'm gonna be paying taxes, right? Yes, yes. Well, usually you're gonna be... Yeah, usually you're gonna be paying taxes. And if you do, you know, this is a way for Hawaii to get some of that money prior to tax time to make sure that they're covered, you know, and that, you know, the non-resident, Hawaii non-resident pays all of the taxes that they owe. Got it. Okay, so let's start with the basics. So, HARPTA stands for, again. The Hawaii Real Property Tax Act. Then it's an assessment that's done on the gross sales price. So, you know, you and I were talking a little bit earlier about examples. Let's just use a million-dollar home sale example. In the case of a million-dollar home sale, a HARPTA that would apply would be 72,500, which is, you know, seven and a quarter percent of the million dollars. So, as you can see, it's a fairly large dollar amount. You know? It's a lot of money. Yeah, it's a lot of money. It's pretty significant. So, people are always looking for ways to try to get over it, get around it, or get through it, one way or the other. Okay, so just to make it clear, if a non-resident of Hawaii, you know, they live on the mainland or they're a foreigner, they're selling a Hawaii Real Property, and let's say you're selling for a million dollars. So, 7.25 percent that has to go to the State of Hawaii Tax Department. Yep, and I should clarify that it's actually not, you know, where it all falls and the responsibility actually falls on the buyer. So, the buyer is the one actually responsible for collecting it, even though it's the seller who pays it. But what happens is, so when the buyer pays their money to escrow, on the buyer's instructions, if harped applies in this million dollar transaction, escrow will set aside $72,500, you know, during the escrow process, the contract phase, and then the seller will receive their proceeds less than $72,500. So, that $72,500 is now considered to be an estimated tax payment that goes to the State of Hawaii if the seller wasn't able to get a waiver for the harped up. Ah, I see. Okay, so this $72,500, the 7.25 percent, it's not, you just lose it. You have to give it away to the State. Yeah, you lose it, but temporarily, you know, of course it feels very painful, especially for people who have not a whole lot of proceeds coming back to them, right? $72,500 can make a really big difference. And so, it can be painful, but it's considered to be a pre-payment towards any taxes that the home seller might owe for either capital gains, or sometimes in the case of general excise tax. You know, if the homeowner had rentals going on and they weren't paying general excise tax, you know, sometimes the general excise tax could be paid out of that harped up. Okay. Well, okay, so it's good news that it's not actually taxed then. Yeah, it's not a tax. The way I look at it, and the way I explain it to a lot of our clients is that it's kind of like the difference between paying rent or paying a security deposit, right? With rent, there's the expectation that you're gonna pay this amount to your landlord, and your landlord isn't gonna give you anything back because you owe the rent. However, with a security deposit, there's the expectation that, okay, I'm paying this over, you know, to the landlord in one case or to the state if you're a home seller, with the expectation that in the end, I'm probably gonna get back maybe most of my money. Who knows, maybe all of my money, but it will depend on my circumstances at the end of my lease and how much I actually owe. So it's very much like the difference between a security deposit and paying rent. Okay, that is a genius metaphor of paying this withholding versus equivalent to like a security deposit where you could likely get back most of it. So thank you for that analogy. Yeah, yeah, you know, I know it's an area of a lot of, I guess you could say distress, you know, when the home seller sees it on their seller statement for the first time, especially if they weren't notified of it beforehand. But you know what, even though if they're notified of it beforehand, sometimes the dollar amount is so large that it can still be quite a shock, you know, it actually is gonna be, you know, behind maybe the payoff to your mortgage company is probably gonna be the largest dollar amount on your estimated seller statement, you know, the statement that escrow gives you when you're in contract. Okay, so in terms of the definition of a resident of Hawaii, can you go into that a little bit? So how would you be exempt? So, you know, I live in Hawaii, then, you know, I don't think I would have to pay Harpta, right? So that's pretty simple because this is my principal resident in the state of Hawaii. Yes, yes, yes. You know, it's a, there are a number of ways to establish Hawaii residency and the two ways are by your physical presence in the state or by something called domicile, which has a lot to do with your intention. Let me talk a little bit about, you know, establishing residency in the state because, you know, there are some people like you and I will who are clearly residents, right? I mean, you know, even if we sold the home, we're still gonna continue to live here. This is where our family is, this is where our job is, and this is where we live. So on one end of the spectrum are people like you and I. On the other end of the spectrum are people who are, you know, maybe own a rental home in Hawaii, but never intend to live here. You know, it's strictly a rental home. Hawaii is just a place to visit from time to time, maybe. But, you know, there's this big gray area, right? In the middle. People who might be considered residents or might not. And, you know, one of the situations we do run into is something you started talking about a little bit earlier where somebody is, you know, has lived here for a while and then they're selling a home within the anticipation of moving to the mainland. One of the things about Harpta is that the state's opinion is that your prior residency really doesn't matter. You could be a resident for 50 years. The only thing that matters for Harpta purposes is gonna be what your residency status is as of the date you close. And so if you're not a resident as of the date you close, regardless of your prior residency status, Harpta will apply. So that's something that's kind of important to understand. Whoa. Yeah. I gotta just kind of get into that. So if I've been, you know, living here all my life, for example, right, long-term resident and, you know, I moved to California in December and we close in December. Okay. So does that mean I have to pay Harpta, even though I've been... You may, you know, and really, it really all depends on where you are at that point in time, right? Here's the thing, right? I talked a little bit earlier about establishing your residency via physical presence or establishing residency during domicile. So let's look at your situation through this lens. How are we gonna establish residency for you? You know, a person who's left Hawaii and is, you know, maybe in the process of moving to California. So if you, you know, the person who's moving to California is trying to establish your residency by domicile, in that case, you may have already given up your residency, right? Because domicile really says, well, first of all, you could only have one domicile at a time for Harpta purposes. So if you've given up your, I mean, if you've already established domicile in California, by definition, you've given up your Hawaii domicile. So, you know, if you've accepted a job in California, if you've, you know, bought a new home or, you know, you're renting a new home, you know, you're living permanently, you know, you're gonna be staying there for a while and you're in the process of selling your only home that you own in Hawaii. You know, from the standpoint of domicile, that really looks like you've already accepted a new domicile of California. So it's gonna be difficult to qualify for residency under domicile for physical presence. You know, if you were physically present for the entire year, you might be able to, you know, make the argument that, yes, I am a resident because look, I've been here for a certain amount of time. However, one of the rules about establishing your residency by physical presence says that your physical presence cannot be temporary or transitory. And those, those words are pretty important because if you're in the process of moving out to California, you know, you've established your, you know, a new place to live and you're only here in Hawaii temporarily, you know, maybe you're here just to sign closing papers or what have you, you know, then in that case, maybe you aren't a resident. So there's really a lot of questions that need to be answered. And everything needs to be looked at on a case-by-case basis, you know. One of the questions I get asked a lot is, you know, how about if I have a Hawaii driver's license or I'm registered to vote? One thing to keep in mind is there's no one specific action that you can take that turns you from a non-resident into a resident. And vice versa, it really all depends on the totality of your circumstances. Ooh, that's a fancy word, totality of circumstances. Well, let's get into military. Okay, okay. Yeah, so, yeah. So if, you know, they come from Virginia to Hawaii, they're here for two, three years. Are they exempt? Are they considered resident for prospective Harpta? That's a great question. You know, we do deal with a lot of military clients. That's why that's kind of a subspecialty of ours. But one thing to keep in mind is that many of the military service members that are stationed in Hawaii actually don't declare Hawaii as your state of legal residency. And let me tell you what that means is what that means is their military income is not gonna be subject to Hawaii income tax. So then they pay no Hawaii income tax on their military income to the state of Hawaii. If they have a spouse, their spouse might be able to declare that other state as their state of legal residency. And it might be possible for the spouse not to have to pay any Hawaii state income tax as well. So because of that, the state says because they are allowed this exemption from Hawaii state income taxes, for the purposes of their home sale, we can't consider them to be Hawaii residents. And so when they sell their home, they may be subject to Harpta. There are ways to get around it because there's a tax rule called the main home gain exclusion that we use that military service members can kind of lean on. It's a federal tax rule that Hawaii follows to the letter. And you know, because they follow this rule, they don't necessarily need to have Harpta withheld if they can get a waiver by applying for one. Okay, let's get into that. Cause we have, I believe a lot of military audience as well. So they come here, they're stationed for three years. They're not paying, you know, they're exempt from paying state income taxes to the state of Hawaii. Yes. So now they're going back to the mainland. Okay. Right? So what happens? So you're saying that they don't have to pay the 7.25%. So let's say they're selling a Ewa Beach house for a million dollars. Okay. Okay. Yeah. That's a good point. Yeah, there's, I guess you, I should clarify. Let's, but you, let's use your example. Let's say they're selling out Ewa Beach home for a million dollars. And they lived in the home, let's say for the last two and a half years. So they've been stationed in Hawaii for two and a half years. You know, shortly after they were stationed here, they bought a home and then they moved into it. And now they've have two and a half years of actually, you know, being in the home, living in the home as their main home, but they're still not Hawaii residents, right? So because they're still not Hawaii residents, Harpta will apply, but they can apply for a waiver with the form that the Hawaii, the state of Hawaii puts out called an N288B. And I won't get too much into the form names, but it's a form that Hawaii puts out that the home seller can fill that out. If they are able to demonstrate to the state of Hawaii reviewers that they shouldn't be subject to capital gains tax on the gain on their sale, then they should be able to get a, what's called the withholding certificate. And that withholding certificate allows them to sell without having to worry about Harpta at all. Okay. Yeah. I believe there was a slight for them. So prior to, before closing, you would have to apply for a, what's called a withholding certificate N288B. Yes. Yes. You got it. N288B. Yeah. And yeah, as you can see the slide there says that the military personnel must submit form N288B to the department for, to apply for a waiver from this withholding, but they can apply for a waiver for this withholding. And we often get it because this tax rule will allow a single individual to waive the first 250,000 of gain on the sale of their house. Or if they're a married couple filing jointly, they can waive up to 500,000 of gain on the sale of their house. So, you know, if a military service member is stationed here for a couple of years, usually their gains will be less than those amounts. So they usually should be able to get a waiver of Harpta, you know, completely. Okay. So let's say in that example, and it's, you know, either a foreign investor or a mainland owner, and let's just use Ewa Beach. Let's go back to the West side. Okay. They purchased the property for $950,000. Okay. They're selling it for a million dollars. Okay. How would Harpta apply, especially they have the cost for the commissions, you know, escrow and title, how does that all work? So, No, that's good. Okay. So they purchased for 950, they're selling for a million, but you talked about some of the expenses that go into the transaction. And there are, there are a lot of expenses that go into a real estate transaction. I mean, if you've ever sold a home before, you're going to see name after name after name, people getting pieces of your money. And so it's something to be aware of. But a lot of these, a lot of these expenses can be considered to be selling expenses that you can use to offset some of your gain. So in the case of somebody who's selling for a million, but purchased for 950, the differential is only $50,000. But chances are pretty good that once you add up things like the commissions for both the buyers and the sellers agent, as well as things like escrow fees, title insurance, even transfer taxes, once all of those expenses are added to it, you might actually be able to generate a loss. And if you can generate a loss, a tax loss, you can file for a Harpta waiver and it shouldn't even be a question. Harpta waivers should be allowable in your instance. Okay. So that's something that you and your company would help with. Yes. Applying for those exemptions. Exactly, exactly. So the thing about these forms is though the forms are, the forms are kind of tricky. And if you, you know, we approach the forms from in our experience doing hundreds and hundreds of these forms before and knowing what the state will accept and what the state doesn't want to accept. And so, you know, that knowledge really helps us to, you know, get the forms done in a format that the state finds acceptable. Wow. Okay. So let's say that you didn't apply for a withholding or an exemption, like permission from the state tax office. And you close and the 72,500 is sent to the state tax department. So what happens next? Okay. There are a couple of ways you can deal with it. If you weren't able to get a waiver or any kind of reduction in heart prior to closing, the way you deal with it is, one, you can apply for an early refund. There is a form called an N288C. And this really, really matters for people who are closing in, say the earlier part of the year, because if you're closing in the earlier part of the year, you don't want to wait until the following year and have to, you know, do a tax return then. So you can file for an early tentative refund after closing. This is something that we do. And surprisingly, what we found is that most refunds for clients who take this route will take between 60 to 75 days from closing until they actually receive a check in the mail. So applying for the early refund is a possibility. But if the person doesn't want to apply for an early refund, they can wait until the following year and they can fill out the Hawaii income tax return. When they fill out a Hawaii income tax return, they should be able to get a refund back that way as well. So there are a couple of ways to deal with it. You know, one is that early refund or the second would be a tax return after closing. Wait a minute. Okay. An early refund. I mean, that's only for the state, right? You can't do that with the IRS. Technically, you can do it with the IRS, it's super, super hard because the IRS has been going, the IRS for the last three years has been, well, two and a half years, the IRS has been going through what's called a log jam. So they call it a log jam of epic proportions. If you've been watching the IRS for the last decade, you may have been noticing, you may have seen that the IRS's budget has been trimmed, you know, more and more and more over the last decade, but it all came to a head when COVID hit and then when this labor shortage hit because it was, a lot of people were working remotely. And then when the IRS figured out they needed a lot more people, they tried to hire, but they were hard to find people because of the labor shortage. So technically it's possible and we've been able to do it in the past. We've been able to get early refunds in the past from a practical standpoint, working with the IRS on this right now, super, super difficult. So, yeah, but you know what the state, the state hasn't suffered the same sorts of problems that the IRS has and the state has been really good about getting back refunds on time. That's great news. Yeah. So basically if you're a seller, you're not potentially a non-resident of Hawaii, make sure they reach out to you, Brad, you know, hard to help LLC to get some advice, right? Yeah, you know, I mean, for those people who know me like you will, you know, I just like talking about taxes. So if you have questions, you know, about your particular situation and you know, particularly if you're a non-resident or a foreign person and you're thinking about selling and you're thinking about the ramifications of what will happen during the sale, give me a call because you know, the good thing about our business is we see so much turnover, meaning that it used to be before when I did, you know, when we just focused on tax returns, you know, I do maybe two or three consulting jobs every month, but nowadays I'm doing three to four, sometimes five consulting jobs in a day. So, you know, the amount of volume that we get allows us to see a lot of different situations and expand our experience. So I think that's primarily our advantage. Wow, okay. That is, I mean, this is jam-packed, it's a wealth of knowledge. And so we talked about Harpta, right? Yeah. For Hawaii. Let's talk about Harpta. Okay. Okay, Harpta is the federal equivalent of Harpta and there's a slide up there right now that's talking about the different rates for Harpta. Harpta can be as low as 0%, sometimes it's 10%. For all practical purposes, I tell people who are, you know, somebody who is a foreign person who is selling, you might as well just assume it's gonna be 15% because it's almost always 15%. But it's a, you know, just like Harpta, it is not a tax in and of itself, it's a withholding. It's an amount that the federal government takes and holds because they have no idea what your tax liability is gonna be. So they take and they hold this amount. And once you can prove to them, if you can prove to them that your tax liability is less than what they're holding, at that point they'd be obligated to give you a refund. Okay, I'm gonna just stop you there. You said 15%, right? Like one, five, 15% for, first up. Yes. And then 7.25% for Harpta. Yes. Okay, so that's a combined, what is that math? 22.5%? Yeah, somewhere around there. So it's like, you know, over a fifth, almost a quarter of your gross sales price for a foreign person, maybe withheld for Harpta and Furpta. So it's a lot of money to be without, especially if you have a transaction that happens, say, in the early part of the year, right? For a lot of our foreign sellers, they want at least part of their money back. So yeah, it's one of those things that it's important for those sellers to know that there is an alternative. There, you know, the IRS and the State of Hawaii are not gonna take this amount and keep it forever, but you have a finite amount of time to get it back. You have three years to get this money back. Okay, so when it comes to Furpta, can you talk about, so who's subject to Furpta and, you know, for example, I'm a US citizen. Okay. So I wouldn't have to pay the 15%, right? Yes, yes, yes, yes. Okay, so who would have to pay the 15% potential? US citizens, regardless of where they reside, are not subject to Furpta. So Furpta wouldn't apply to anyone who's a US citizen, regardless of where in the world that they live. It applies to what are called foreign persons. And foreign persons are people who, you know, another group of people that don't apply to foreign persons are people who are green card holders. If you are a green card holder, Furpta won't apply. But those people who are, you know, residents of another country and don't live in the United States, don't have a green card, or entities that aren't registered to do business in the United States or maybe considered to be, you know, foreign owners as well. Those foreign owners are going to be subject to Furpta. Wow. So for a million dollar property, if they were subject to Furpta and Harpta, the amount they would have to pay is, how much is that? 200? Over 220,000, yeah, so 15% for Furpta and it's going to be 7.25% for Harpta. So it's, yeah, 220,000, something thousand. Okay, so that is a lot of money for a million dollar property. And, you know, in terms of trying to get exempt, of course, you know, make sure you consult with a tax professional like Brad's company. So we talked about Furpta. We talked about Harpta. Any last words for the audience? You know, I think I started off with my final message. I'm going to say it again. You're going to see this on your estimated seller statement if you're selling, if you're a, you know, non-resident of Hawaii or a foreign person, don't freak out. This is just a withholding and you are entitled to get this money back. But also on the other side of the coin, don't walk away. This money is yours. This money that's being paid for Harpta or Furpta, if it's withheld, this money is being sent to the IRS or to the state. And it's your obligation to go and get this money back. You have three years to get it back. After that three years is over, you have no way to get it back. So just make sure, make sure you don't give up. You always try to get that money back one way or the other. Okay. Wow, this is, I mean, I learned so much, Brad. I mean, you're a little bit at Harpta and Furpta, but I'm always learning something new from you. And how do people find you? Oh, you know what? It's easy to find us harpta.com, www.harpta.com or you can send an email to info at harpta.com or you can call us at 808-737-4412. Give us a call on weekdays, you know, sometime between nine and four or so and I'll be glad to talk to you. Okay, great. Well, thank you so very much, Brad. You are awesome. And I'm sure that everyone learned a lot about Harpta and Furpta. And you make it fun. They're so passionate about it. Thanks a lot. Thanks a lot for talking to me. Well, I always enjoy talking about this subject with you or anyone. Okay, thank you so much, Brad. Okay, take care, Brad. We'll see you again. Thank you so much for watching Think Tech Hawaii. 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