Tax Considerations When Selling
As you explore the possibility of selling your property, it's essential to be aware of the various tax considerations that may impact your transaction. Capital gains along with two important regulations to understand are HARPTA (Hawaii Real Property Tax Act) and FIRPTA (Foreign Investment in Real Property Tax Act). Below, I've outlined key information about these withholdings to help you navigate the selling process smoothly.
Capital Gains Tax
When selling your home, one financial consideration to keep in mind is the capital gains tax. This tax is imposed on the profit you make from the sale of your property. To calculate your capital gains, subtract the property's purchase price (adjusted basis) from the selling price. If the result is positive, indicating a profit, you may owe taxes on that gain. Several factors can affect your capital gains tax liability, such as:
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Duration of Ownership: How long you've owned the property.
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Primary Residence: Whether it was your primary residence.
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Home Improvements: Any qualifying home improvements made.
Understanding these factors and any available exemptions or deductions can help you manage your capital gains tax obligations effectively. Consulting with a tax professional or financial advisor can provide personalized guidance tailored to your specific situation.
Out-of-State or International Owners
Maui's real estate market is a strong long-term equity growth market, attracting investors globally. Nearly one-third of real estate across Hawaii is owned by non-residents, presenting both state and federal governments with challenges in collecting applicable taxes. It's crucial for buyers and homeowners to understand the withholdings imposed based on non-Hawaii residency (for out-of-state owners) and non-US residency (for foreign nationals).
HARPTA and FIRPTA
HARPTA: To address the challenge of collecting applicable taxes from non-resident sellers, the Hawaii state government enacted the Hawaii Real Property Tax Act (HARPTA) during the 1990s. HARPTA requires a withholding of 7.25% on the amount realized—typically the sales price—when non-Hawaii residents sell real estate anywhere in the state.
FIRPTA: For non-U.S. residents who have invested in real estate in the U.S., the Foreign Investment in Real Property Tax Act (FIRPTA) comes into play. Enacted in 1980, FIRPTA ensures that the federal government can collect applicable taxes from non-U.S. property owners generated through real estate transactions. Similar to HARPTA, FIRPTA requires the withholding of funds to ensure that applicable taxes are collected, with a current withholding rate of 15% on the amount realized through real estate sales transactions.
Withholdings, Not Taxes
It's important to note that HARPTA and FIRPTA are not taxes themselves; rather, they are withholdings made to ensure that any applicable taxes from such sales are collected in a timely and effective manner. For some sellers, the actual tax liability may be less than the withheld amount, and they may be eligible for a refund of the excess withholding. Consulting with a Qualified Intermediary or Tax Advisor is essential for proper guidance on executing transactions.
While the collection and remittance of HARPTA and FIRPTA are typically the contractual obligation of the buyer in Hawaii, it's important to understand these aspects thoroughly to ensure compliance and smooth transaction processes. As always, this information is for guidance purposes only and should not be construed as legal, financial, or tax advice. For personalized advice, consulting licensed and reputable advisors in the respective sectors is recommended.
If you have any questions or need further information, please feel free to reach out to me at 808-315-1699 or via email at Jyoti@MauiLuxeProperties.com. I'm here to help you navigate the selling process and ensure you have all the information you need.
Posted by Jyoti Graziano on
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