FOREIGN OWNERSHIP IN HAWAII
Regardless of what you have heard, anyone in the world can buy and own property in Hawaii.
However there are restrictions on the usage of property. Foreign owners may not use the property as a permanent residence unless they have a Green Card or a Visa, which allows them to stay full time in the US. Most Foreign buyers, buy for investment purposes, or as a vacation home.
The biggest problem you will have as a foreign Buyer is funding. Many buyers think they can get funding in their own country. Not true! Many lenders in foreign countries will not lend on investments made in the USA. So foreign buyers will either need cash, or qualify for a loan here.
However, getting a loan here can be a problem. Lenders will require a larger down payment of 25% to 50%, depending on the property. Also Foreign owners will have to verify their income and assets and show their debts, so they can get an acceptable LTV (loan to Value) ratio for the loan. However verifying income and assets in a foreign country can sometimes be impossible.
As is required of US citizens, Foreign owners must pay tax on capital gains when they sell the property. The biggest stumbling block for Foreign sellers is the FIRPTA and HARPTA withholding requirements. Escrow will withhold 15% of the sale price for FIRPTA and 5% of the sale price for HARPTA. The most critical factor of withholding is that the Seller needs a federal taxpayer identification number, a SSN, FIN or TIN. If you do not have one, you should apply for one ASAP, otherwise, at closing, the withholdings will be sent to the governmental authorities without a number. This can make it difficult for the seller to prove the funds are theirs, if a refund is due.
Foreign sellers can no longer get a SSN and to get a TIN they must show the need for one. This is usually done by showing that the property is an investment property and that the owner needs to file taxes, to declare income, or that there will be a taxable event upon sale.
Sellers can also apply for a reduced withholding, if they are making no, or little, profit on the sale, AND they have a TIN.
If the Seller is a corporation, they will need to supply a Corporate Resolution, a Certificate of Good Standing (with English translation) and a TIN.
HARPTA and FIRPTA Explained
When foreign owners sell property in Hawaii, they become subject to two Withholding taxes, HARPTA and FIRPTA
The Withholding Tax is not a true tax. It is funds withheld by the government, until the foreign person files tax documents at the end of the year. The withholdings are then applied as a credit towards the actual tax liability due on the sale. In the event too much money was withheld, the foreign person would then receive the excess amount returned to them, in the form of a refund.
FIRPTA is the Federal law, the Foreign Investors Real Property Tax Act. As of February 17, 2016 the Firpta withholding was increased from 10% to 15% of the Sale Price. However, the actual tax liability is based on the Capital Gains made on the sale of the property. So investors with a small Capital Gain on the property, will receive a larger refund, after filing taxes.
HARPTA is the Hawaii State version of the withholding tax. Harpta withholdings are 5% of the sale price. Again, once tax documents are filed, any excess withholdings would be returned to the seller/investor.
Foreign sellers must keep this in mind when selling and expect to see 20% of the Sale Price withheld in escrow. Thus it is important they contact a CPA and prepare to file tax returns, to receive their refunds. However, due to procedures, the tax documents needed to file for a refund will not be available until the February following the year of sale.
Incidentally, the Harpta rules also apply to US Citizens who do not reside in Hawaii.
Hawaii State law requires that any investment property, which is rented out, have an “on island” property manager/contact, if the owner does not live on the same island as the rental unit.
Other useful links