A quick read of how the sale of main home exclusion affects your Hawaii HARPTA withholding.
Hawaii HARPTA quick recap
When you sell a property in Hawaii and you are not a resident, the Hawaii tax code requires you to “deposit” a portion of your sale proceeds as a tax withholding to make sure that you pay your tax on any gains and that you are in tax compliance with the state.
Any gain or loss from the sale will be reported and computed on your income tax filings for the year of the sale, and if the deposit was too much, you will be due a refund.
Since you don’t file a current year’s tax return until the following year (in most cases), Hawaii offers form N288C to request an early refund.
Since there are so many property owners that have not been tax compliant or that have attempted to game the system with aggressive and inappropriate deductions, Hawaii has a task force to audit these filings and it’s very likely your claim for a refund will be audited.
Disclaimer: The information provided on this page is very general and does not account for all situations. You can’t use this post as a guide to filing or handling an audit – its purpose is to give you a quick introduction to the basics of the sale of main home exclusion and how it relates to HARPTA. You are either going to need a professional or you must take the time to read the IRS and Hawaii publications and the tax codes prior to filing or responding to a state examination (audit). Audits are especially tricky because many taxpayers do not understand the terms involved with an audit.
The sale of main home exclusion and form N288C
You can’t claim the exclusion on this form for your early refund.
N288C is the form that you file so you don’t have to wait for several months for the year’s tax returns to come out. You use it to claim an early refund of your Hawaii HARPTA withholding. Then when the tax returns are due, you file an income tax return (usually form N15) to reconcile any changes or needed adjustments.
This form does not allow for the sale of main home exclusion – so you must file without it and catch up with the rest of your refund when you file the income tax return.
For the sale of main home exclusion – what does “main residence” mean?
IRS publication 523 (link opens in a new tab) spells out what this means, so if you don’t have a tax professional who does your taxes, I advise reading the publication slowly and carefully. Note that publications are not actually the tax laws, so you may need to reference those too.
Don’t hold me to this, but the TL;DR answer is that your main residence is the place that you come home to after work and “hang your hat every night”, with the exception of temporary absences like traveling or a short job assignment where your employer puts you up in a hotel (or something similar).
So if you went to the mainland for 3 years to see if you liked it and then came back, your Hawaii property would not be considered your main residence for those three years. This is true even if it was your only property.
Will Hawaii find out if I take some liberties with the exclusion dates?
First of all, I’m not judging you, but I will advise you not to cheat on your taxes. It’s going to lead to problems for you at some point, I’ve seen it too many times. Pay your fair share, sleep at night, and be a proud citizen (difficult in these times, I know, but its still satisfying in some ways).
I don’t mean to sound harsh, by the way. I want you to like me. But I’m not writing this to be your friend – I’m advising you.
If you are considering deviating from the facts and circumstances, realize that Hawaii is very trained and skilled at flushing out the truth in these cases.
They are much better at it than you would think.
I often go through vicious battles with them when I represent clients in these audits and the examining task force is a formidable opponent. Every time that the client was lying on their taxes (and to me) the state has ruthlessly flushed out the truth and held the taxpayer to the tax code (and added EXTRA penalties).
This is about money, and they’re not playing around.
The sale of main residence exclusion and rental property
If you moved out prior to renting out your property to others, the rules are pretty straight forward. You basically must meet the main residence eligibility test of having lived there as your main residence for at least 2 of the last 5 years.
There are some exceptions to those rules which I will write about later.
But when it comes to rentals, the sale of main home exclusion does NOT exclude section 1250 gains – a complicated part of the tax code which is often referred to as “depreciation recapture” (that’s not really what that tax term means, but do a quick search for “depreciation selling a rental property” and you will see a zillion articles that try to explain it).
1250 gains may also apply to when you took a deduction for a business use of your home.
Also, the computation of your exclusion gets very complicated if you rented out your property and then moved back in prior to selling it. There’s a complex worksheet that figures out how much exclusion you get when this is the case.
Claiming a partial sale of main home exclusion
If you had to sell your home for certain reasons, such as (some circumstances of) a work related move, a health related move, or other unforeseeable events, there is a provision for which you can “pro-rate” the exclusion if those events caused you to move and this “messed up” your 2 in 5 years eligibility.
As stated earlier, if you rented out property, then moved back into it, then sold the property, you might only qualify for a partial exclusion. This also might be true if you used your home for your business at all.
Exceptions to the 2 in 5 year rule of the exclusion
There are also exceptions and extensions to the 2 in 5 year rules.
If you are a military service member, you might get a 10 year extension to the 2 in 5 year rule, making it 2 in 15 years.
If you moved to go into a care home, you might only need 1 in 5 years.
Again, your answers to these specific scenarios (and more) lay in the publication. It’s your option to either read it through or hire a professional to sort it out for you.
What will Hawaii require of you to substantiate your main residence?
They will want to see a number of things.
Here are some things that they might ask for and what you can show to prove your case.
Unfortunately, the burden of proof is on you, not them. Hopefully you can show a reasonable amount of these things and wind up with a pleasant outcome.
- Hawaii will check to see which address you used to file your federal taxes in the year that you claimed your Hawaii property to be your main residence. They will also look for any additionally files state tax returns. If you used a different address for those years, or if you filed a California income tax return, for example, proving your main residence in Hawaii might be difficult.
- If you moved out of your residence at some point to rent it out, and you want to prove the date you moved out, it would help to have a copy of a lease (as the landlord) that is close to the last day that you are claiming “main residence”.
- You also might want to show a receipt for an airline ticket around that time (or a credit card statement with the purchase). Unless you sailed to the mainland (I have a really cool client who does that). Hopefully, you have a record of a ticket purchase.
- Hawaii might look at your social media posts (if they can and you have any). If you or your spouse are food bloggers, this might be used against you when it comes to proof of residence. My wife is a foodie, and she tags me in every post. It would be hard for me to prove I didn’t live in Honolulu for all of these years.
- If you can show a property purchase statement or a new lease record for your new residence around the date you moved out – that would help.
- I was representing a client who had very little of these things, and we thought we were toast. Then he requested his personal credit card statements for the time period and those contained most of the proof we needed. Right up until the move date, on a very regular basis, he gassed up at the Shell station on McCully (should have went to Costco), enjoyed dim sum at Jade Dynasty (OMG, yum), and paid for parking at Kaimuki and Kakaako (cool). Then after the date he moved, it was all like: “Ikia”, “Trader Joe’s”, and “In and Out Burger”, LOL. Ha ha! – we got em there! The examiner even laughed.
- A receipt or a charge on your statement from a moving company would be nice help.
- You can also provide documents form a new job (or your notice to your old job) of some sort.
- Bank statements, showing paycheck deposits form each employer, will help to clear up where you were and when. Also, rent check deposits and GE Tax return filings could also substantiate when you started renting the property as a landlord.
- Transfers, deposits, and refunds form deposits to utility companies might help.
- Package shipping history from Amazon. Usually, these are delivered to a main residence.
- Did you take any local classes, have a Yoga or Karate contract, or belong to a paddling league?
- I’ll add more items to this list as they come up. I’m gun-slinging off the top of my head.
That is my summary on Hawaii HARPTA and the same of main home exclusion.
Thank you for reading and best wishes with your HARPTA situation.