Asking for a friend who's primary residence is here in San Diego and owns a 2nd home / vacation property in Hawaii
His tenant in Hawaii wants to buy their house from them — He has cash and is offering $390,000. They bought the place for $330,000 within the last year. They are trying to figure out exactly how much they would walk away with after taxes. Here's what I know...
1) The property is technically a "second home" rather than an investment property or a primary residence.
2) I'm assuming given there is a cash buyer it'd be possible to close this with a lawyer / title company for $2,000ish.
3) Because they bought the place less than a year ago, any profit is subject to short term capital gains tax. This is straightforward—from a federal tax perspective, any profit would simply be seen as additional income and taxed like regular income.
4) His main question --> "What I haven't been able to get a straight answer on yet is what I'd be taxed in terms of short term capital gains tax at the state level. Given I'm a resident of California, but the property is in Hawaii, would I pay short term capital gains in CA or HI?"
- From what I've read if we have to pay in Hawaii the short term capital gains tax is 7.25% of the total sale price of the property (not just the profit), then you have to submit some form to get refunded any amount that you overpaid. https://www.hawaiilife.com/blog/help-with-harpta-get-your-questions-answered/
- From a CA perspective, it sounds like we'd pay 15% of the profit? https://smallbusiness.chron.com/calculate-california-tax-gain-21401.html
Basically He's trying to figure that bit out, so he can get a sense of how much profit they'd actually walk with after taxes—that's basically going to determine if they sell the place or not.
Any thoughts or resources would be appreciated!
@Maxwell Ventura . If it were me, I would ask a professional CPA in both Hawaii and California then move forward from there. Good luck
States normally don't tax a certain income source twice. There is normally a credit given to you on your resident state tax return for taxes paid to a different state.
The interesting thing in this scenario is that we are dealing with a second home/capital asset(instead of a business asset). Would Hawaii have the ability to tax it eventhough it is a capital asset. Most likely but something that needs to be researched.
Something that should be researched.
Hawaii Taxes you Might Owe:
Hawaii state income tax returns are due each year you rent property on Hawaii. This is true whether or not your rental creates taxable income or not. There can be significant differences between federal and Hawaii depreciation allowances and it is possible that you owe Hawaii state income tax on the rental even if you did not show a profit on your federal return.
Hawaii General Excise Tax (GET) of 4.00-4.50% is due on all long term rental of over 30 days. GET and Transient Accommodation Tax (TAT) of 10.25-10.50% is due on all short term rentals of under 30 days. The HARPTA withholding is collected to ensure non-Hawaii resident sellers of real estate pay any state taxes connected to the transaction.
You are subject to Hawaii capital gains tax of up to 7.25% on the profit (gain) realized on the transaction.
Once you are current on all of the taxes above, you are eligible to file for an early refund of the withheld tax based on an estimate of the tax you may owe. If your estimate is zero, you may be able to recover the entire amount prior to filing your next HI state income tax returns. NOTE: Any unfiled GET/TAT/Income tax returns must be filed prior to receiving a HARPTA refund.
Here is a calculator that might help, it is from a local Title company that I like to use. http://express.tghawaii.com/es...
I recently spoke to an accountant who practices and is licensed in both Hawaii and California. She did say that the seller would pay taxes in both states, however, whatever she paid in Hawaii would be deducted from what she owed in California. The subject property was a condo and the owner lived in Santa Barbara. Hope this helps.