In order to promote a greater level of compliance by non residents of Hawaii (whether U.S. persons or foreigners) in reporting income from sales of real property located in Hawaii, the Hawaii legislature enacted (and recently amended Section 253-68, Hawaii Revised Statutes), requiring every buyer of Hawaii real estate to deduct, withhold, and pay to the Hawaii Department of Taxation 5% of the amount realized by the seller or transferor of Hawaii real estate. This withholding requirement , as amended, is effective on August 1, 1991.
This 5% withholding tax is designed to enforce Hawaii state income taxes on the sale or disposition of Hawaii real estate in the same manner as the enforcement provisions of the Foreign Investment in Real Property Tax Act o 1980 (FIRPTA) Similar to FIRPTA enforcement provisions, the state tax,-withholding requirement would not increase the amount of income tax paid by non residents since the amount withheld will be claimed as a payment on the Hawaii Non resident income tax return.
Under the Hawaii withholding requirement, the buyer or transferee of any Hawaii real estate is required to (1) withhold and deduct a tax equal to 5% of the amount realized by the seller or transferor upon the disposition of the property and (2) file forms N-288 and N-288A to report and transmit the amount withheld to the Hawaii Department of Taxation within 20 days of escrow closing, unless one of four exemptions apply.
EXCEPTIONS FROM WITHHOLDING:
1. Transferor furnished Hawaii Residen Certification. NO withholding is necessary if the seller or transferor furnishes to the transferee a properly completed form N-289stating (a) the transferor’s taxpayer identification number and (b) that the transferor is a Hawaii resident. However, this exemption will not apply if the transferee as actual knowledge that the information on the form N-289 is false. (Note that the recent amendments to the definition of Hawaii resident for purposes of the withholding required by HRS S235-68 would include foreign corporations and partnerships, which are registered with the Hawaii Department of Commerce and consumer Affairs to do business in the state of Hawaii.
2. Transferor’s Affidavit of Principal Residence. No withholding is necessary if the transferee receives an affidavit by the transferor stating (a) the transferor’s taxpayer identification number, (b) that the transferor used the property as a principal residence for the year preceding the date of the transfer and (c) the sales price for the property does not exceed $300,000.00.
3. Transferee Receives Hawaii Withholding Certificate. (a) The withholding under HRS S235-68 may be reduced or eliminated pursuant to a “withholding certificate issued by the Hawaii Department of Taxation. A withholding certificate may be issued by the Hawaii Department of Taxation upon receipt of Form N-288B establishing that either (1) the transferor will not realize any gain with respect to transfer or (2) the transferor will have insufficient proceeds to pay the withholding required by HRS S235-68 after payment of all costs,including selling expenses and the amount of any mortgages or liens secured by the property. (b) The withholding may also be reduced or eliminated pursuant to a written agreement with the Hawaii Department of Taxation. Persons who engage in more than one real property transaction in a calendar year or to whom meting the withholding requirements are not practicable are eligible to enter into these written agreements.
4. Notice of NON-recognition Treatment. No withholding is necessary if transferee receives from transferor a properly completed Form N-289 stating (1) the that transferor is not required to recognize gain or loss with respect to the transfer and (2) briefly describing the transfer and summarizing the law and facts supporting transferor’s claim. Non-Hawaii residents doing 1031 exchanges of real estate may consider this option to avoid withholding.