Like a number
of other U.S. states, Hawaii law requires buyers or transferees of Hawaii real
property from nonresidents to withhold and remit a tax, which is designed to
make sure the nonresident seller reports and pays any income tax due on the
sale. The withholding rate has been 5% since the law was enacted in 1991. It is
not clear what prompted the legislature to increase it to 7.5%.
exempts sellers where the real property has been used as the seller’s principal
residence for the year preceding the date of the contract, and the contract
price does not exceed $300,000, or the seller is not required to recognize any
gain under a non-recognition provision of the Internal Revenue Code. Tax
Information Release No. 2002-2 (May 8, 2002) explains that the latter includes
section 121 of the Internal Revenue Code, which has been adopted by
if gain is not taxable because a property was the principal residence for
qualifying periods and the other requirements of section 121 are met, no
withholding is required.
are exempt if they are chartered or domesticated in Hawaii; domesticated partnerships
are also exempt. Generally, this means that corporations registered to do
business in Hawaii are exempt. Hawaii defines an individual as a
"resident" in a detailed manner and the "resident"
exemption needs to be determined in light of these definitions. TIR 2002-2 says
that residency status is determined at the time the sale closes.
are certified on Form N-289, which does not require Hawaii Department of
Taxation approval. If there is no gain on the sale, the seller may obtain a
waiver from the Department of Taxation by filing Form N-288B at least 10 days
before the date of transfer.
Related: U.S. IRS Reiterates Position Limiting Deduction of Pre-Paid 2018 Property Taxes
limited instances in which the Hawaii withholding tax applies to a relocation
transaction, Worldwide ERC® members must be careful to withhold the correct
(higher) amount. There are substantial penalties for inadequate
In a typical
relocation transaction, two separate transfers of the employee's property
occur: The first is the transfer from the employee to the corporate employer or
relocation management company, and the second is the transfer to an independent
third-party buyer. The employee usually will be exempt from withholding due to
the exemption for sales of the principal residence, or because the employee was
still a resident at the time of sale. Consequently, the only impact on the
first sale in a relocation transaction generally is that the employer or
relocation management company has to be careful to create or obtain the
necessary paperwork to support whatever exemption is being claimed.
subsequent sale by the corporation or relocation management company generally
will also be subject to withholding if the company is not a resident of the
state, unless the company takes advantage of other means of avoiding it. As
noted, Hawaii allows the seller to avoid withholding if it can demonstrate that
there is no gain on the sale.
depending on when the sale occurs, and the employee’s residency status at that
time, there may be instances when the withholding applies.