HARPTA
Today, a client asked us, "If I own a property on Oahu using an out-of-state company LLC, am I subject to out-of-state withholding tax"
The answer:Yes, you are subject to it. It is actually called HARPTA (Hawaii Real Property Tax Act), and an out-of-state LLC is considered a non-resident person under Hawaii tax law.
1. It is a Withholding, Not an Extra Tax
The most important nuance is that HARPTA is not a separate penalty tax for out-of-state owners. It is a backup withholding system designed to ensure that non-residents pay their state capital gains taxes before taking their money out of Hawaii.
When you sell the property, the escrow company is required by law to withhold 7.25% of the total gross sales price (not your net profit) and send it directly to the Hawaii Department of Taxation.
2. Why the LLC Structure Doesn't Bypass It
Even if you register your out-of-state LLC to do business in Hawaii as a "foreign LLC," Hawaii tax authorities look at where the entity was formed. Because your LLC is an out-of-state entity (and likely a pass-through entity for tax purposes), it does not qualify for the automatic resident exemption.
3. How to Get Your Money Back
Because HARPTA takes 7.25% of the gross sales price, the amount withheld is almost always significantly higher than the actual state capital gains tax you owe on your net profit.
The Fast Route (Form N-288C): You can file an application for a "Tentative Refund" as soon as closing is finished and the state acknowledges receipt of the funds. This allows you to get your excess money back within a couple of months rather than waiting until the next year.