3.4 Hawaii Closing Procedures

Escrow Closings in Hawaii

Hawaii uses the escrow closing model. A neutral escrow or title company holds the deposit, collects documents and funds from both sides, follows written escrow instructions, and disburses only when every condition is met. Unlike some mainland states, Hawaii does not require an attorney at closing, though parties may hire one for complex deals.

Conveyance Tax (HRS Chapter 247)

Hawaii imposes a conveyance tax on the transfer of real property, customarily paid by the seller (negotiable). It is tiered by sale price, and there are two schedules: a lower set of rates when the buyer qualifies for the county homeowner exemption (owner-occupant) and a higher set when they do not. The minimum tax is $1.00.

Worked example: A home sells for $800,000 to a buyer who will owner-occupy. That value falls in the $600,000-to-$1,000,000 tier at $0.20 per $100. $800,000 / $100 = 8,000 units; 8,000 x $0.20 = $1,600 conveyance tax. If the buyer were an investor (no homeowner exemption), the $0.25 rate yields 8,000 x $0.25 = $2,000. The exam tests whether you pick the correct schedule for the buyer's intended use.

HARPTA and FIRPTA Withholding

Two separate withholding regimes target sellers who may not file Hawaii or U.S. returns. Keep them straight - they stack.

Key points the exam targets:

• HARPTA withholding is on the gross sales price, not on the gain, so it often over-withholds; the seller files to claim a refund of the excess.
• A seller can apply (Form N-288B) for a reduced or waived HARPTA withholding before closing - for example when the actual tax will be far less than 7.25%, on a loss sale, or for a qualifying 1031 exchange.
• A Hawaii resident seller has no HARPTA withholding (the seller signs an affidavit of residency).
• A foreign seller can owe both HARPTA (7.25%) and FIRPTA (15%) on the same sale.

Worked example: A California resident (U.S. citizen) sells a Maui condo for $1,000,000. HARPTA withholding = 7.25% x $1,000,000 = $72,500 sent to the Hawaii Department of Taxation. FIRPTA does not apply because the seller is not foreign. If the seller were instead a foreign national, FIRPTA would add 15% x $1,000,000 = $150,000 to the IRS on top of the HARPTA amount.

Title Insurance

Title insurance is a one-time premium paid at closing and protects against covered title defects discovered later (forged deeds, missed liens, recording errors). It does not cover problems disclosed and excepted in the policy.

Prorations and the Tax Calendar

Recurring charges are prorated as of the closing date so each party pays only for the time they own the property. The seller pays through the closing date; the buyer takes over from there. Common prorated items: property taxes, condominium/association fees, lease rent (on leasehold), and rents on income property.

Hawaii's real property tax year runs July 1 to June 30, with two installments:

Trap: Because billing lags the assessment, a closing may occur after the seller has paid a half-year already, requiring the buyer to credit the seller for the prepaid days, or the reverse if taxes are unpaid. Always determine whether the period is paid or unpaid before deciding which party owes the credit.

Recording, the Two Title Systems, and Closing Statements

Hawaii is unusual in maintaining two parallel title systems, and the exam tests the distinction:

Many parcels are dual (partly Regular, partly Land Court), and documents must be filed in the correct system; a deed recorded in the wrong system gives no protection. Escrow handles this routing at closing.

Worked Closing-Statement Example

Put the pieces together. A non-resident seller's Oahu condo (owner-occupant buyer) sells for $800,000; the closing is exactly mid-year through the tax period and second-half taxes of $3,000 are unpaid.

The seller's net proceeds equal sale price minus the mortgage payoff, conveyance tax, HARPTA, commission, prorated unpaid taxes, and title charges. Because HARPTA over-withholds on gross price, the seller files afterward to recover any excess. Mastering which side each item lands on is exactly how closing math is tested.