FIRPTA and HARPTA are not minor closing details. They can materially affect net proceeds, timing, and documentation requirements. Sellers are often surprised because the withholding is based on the gross sales price, not simply the gain.

In other words, a seller can reach the closing table expecting one number and see something materially lower if these issues were not identified early.

The right time to address FIRPTA or HARPTA is before the sale is deep into escrow.

FIRPTA, the Foreign Investment in Real Property Tax Act, is a federal withholding framework that may apply when a foreign person sells U.S. real property. It is designed to ensure collection of potential federal tax due on the sale.

In many transactions involving a foreign seller, withholding of up to 15 percent of the gross sales price may be collected at closing and remitted to the IRS. This is typically not the final tax owed. It is generally treated as an advance withholding that is later reconciled through tax filing.

• FIRPTA generally turns on the seller’s foreign status, not the buyer’s.
• The buyer is typically the withholding agent, with escrow helping administer the process.
• Exceptions, reduced withholding, or certificates may be available in some cases, but they require proper advance handling.

HARPTA, the Hawai‘i Real Property Tax Act, is a state-level withholding rule that may apply when a nonresident sells Hawai‘i real property. Unlike FIRPTA, HARPTA is based on Hawai‘i tax residency and can apply even to U.S. citizens living outside Hawai‘i.

HARPTA generally requires withholding of 7.25 percent of the gross sales price at closing, remitted to the Hawai‘i Department of Taxation. Like FIRPTA, this is commonly a withholding or prepayment, not necessarily the seller’s final tax liability.

1. Who may be subject?
   Anyone not treated as a Hawai‘i resident for tax purposes, including many mainland-based owners.
2. How much is withheld?
   Typically 7.25 percent of the gross sales price, not the gain.
3. Is this a tax?
   Usually a withholding or prepayment that is later reconciled through Hawai‘i tax filing.
4. Can it be reduced or waived?
   Sometimes, yes. Sellers may be able to request a waiver or reduction in advance, subject to approval and proper filing.

The most common mistake is assuming these rules only affect foreign nationals or unusual transactions. HARPTA can apply to many mainland sellers, and both regimes can change closing expectations if no one raises the issue early.

What catches sellers off guard is not the law itself. It is the size of the withholding and the timing of the discovery.

If residency status, gain estimates, exemption possibilities, or reduction requests are not evaluated in advance, escrow may be forced to proceed with full withholding at closing.

• Whether the seller may be treated as foreign for FIRPTA purposes
• Whether the seller may be treated as a nonresident for Hawai‘i tax purposes
• Whether an exemption, reduced withholding, or waiver may be available
• Whether the expected net proceeds at closing will be materially affected
• Whether a tax professional should be involved before the property closes

FIRPTA and HARPTA are not exotic side issues. They are material withholding rules that can affect proceeds, planning, and closing logistics.

The smartest approach is to identify the issue early, understand whether it applies, and evaluate whether a reduction, waiver, or other planning step may be available.

Consult qualified tax and legal professionals for guidance based on your specific facts, residency status, and contract terms.

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