It is recommended in the J-1 period to have the property inspected by a professional licensed home inspector. I will provide you with recommendations for you to review and decide whom to use. The Seller is required to provide a Seller’s Real Property Disclosure typically within the window of the J-1 period. This allows you, myself, and the home inspector to review for any previous or current issues to be noted.

Generally, a standard home inspector’s report will cover the condition of the following:

The fee for these inspections vary on the size of the residence. If you are acquiring an FHA or VA loan, an inspection of the property will be required. Please inquire for more information.

The inspection is a valuable tool in the process for further considerations in the purchase and puts the buyer on notice of most major defects in the property and repairs that buyer otherwise would have to undertake after taking possession. A thorough inspection may cause some buyers to back out of a sale, negotiate a lower sales price or ask the seller for repairs before closing: choices that a buyer without an inspection report would not have.

The following is a list of customary closing costs (including Hawaii General Excise Tax where applicable)

Charge to Buyer, if applicable:

As part of the sale, the buyer can negotiate with the seller to pay a portion of their closing costs up to a certain percentage depending on the law and type of mortgage involved.

Choose a lender who is willing to explain the pre-approval, approval and closing processes clearly. Be sure that your lender explains all fees, up-front costs, taxes, insurance and other costs of owning a home.

Generally you must establish a few things in order to qualify for a mortgage loan; for example, adequate income to support the continuing loan obligations and credit worthiness to demonstrate persistence in meeting credit obligations.

The lender will consider your income to determine the amount of loan. Lenders look at your debt to income ratio to determine the amount of loan you will qualify for. In other words, the balances on your credit and other loans will reduce the amount of the mortgage loan you will qualify for. Your credit score determines the amount of interest and type of loan you can qualify for.

The down payment is equally important. This is the amount of money you have to reduce the amount you need to borrow or increase the value of the house you can purchase. Some of your down payment can be applied to your loan to decrease your loan interest; this is called buying down points.

-Pre-Approval Letters

Before you begin the process of finding your home or investment it is a good idea to understand what you are able to afford and how much you feel comfortable spending. Consult with your lender, CPA or personal source who will help you determine your ability to pay for your purchase whether all cash or if a lender will be involved. It has become customary prior to starting your search that your Broker or agent will check and work with you to secure your ability for your purchase of real estate. With any offer the Seller will want to see a pre-approval letter if a lender is involved. This letter tells the seller and their agent how much of a loan you qualify for, excluding the amount you have available for a down payment or have to bring to the closing table. This is based on your income, expenses, and credit, a lender will provide you with a pre-approval letter for the loan amount and type of loan that they are willing to lend to you based on those factors.

The purchase of a home is the largest investment most people will make in a lifetime; therefore, the importance of fully protecting such an investment cannot be overstressed. Title insurance is protection which assures that the rights and interests to the property are as expected, that the transfer of ownership is smoothly completed and that the new owner receives protection from future claims against the property. It is the most effective, most accepted and least expensive way to protect property ownership rights.

Because land endures over generations, many people may develop rights and claims to a particular property. The current owner’s rights—which often involve family and heirs—may be obscure. There may be other parties (such as government agencies, public utilities, lenders or private contractors) who also have “rights” to the property.

The lender requires title insurance to protect the investment in case the title comes into question after closing. Title insurance for the homeowner can be purchased at the same time so that the homeowner’s interest in the property can be protected.

After a purchase agreement has been signed, the escrow company steps in as a neutral third party to process and oversee the money and documents involved in transferring property ownership. The buyer and seller will sign escrow instructions, which list the contingencies from the purchase agreement and any other requirements for escrow to close.

The escrow company will require you to also complete a Statement of Identity form in order to differentiate you from others who may have the same name and, possibly, judgments, bankruptcies and liens filed against them.

While the transaction is in escrow, the escrow company will provide the following:

Closing is your final step in the process. During closing, the deed of title is delivered to the buyer, the title is transferred, financing documents and title insurance policies are exchanged, and the agreed-on costs are paid. Some of the final documents, including the deed and mortgage or deed of trust, are signed by the appropriate parties, and then delivered to the Bureau of Conveyances in Honolulu County to be recorded. Being on a neighbor island typically all documents to be recorded are pouched by escrow to Honolulu BOC two days prior to recording.

The length of the escrow period is determined between the Buyer and Seller. It can range from a period of less than 2 weeks to several months and will be specified in the purchase agreement. However, before escrow can close, several events must first occur:

With the recording of the documents, which signifies the legal transfer of title, escrow closes. Time for your keys!

Utilizing a 1031 Exchange in the Sale or Acquisition of investment Real Estate (please consult with your CPA or Attorney if a 1031 exchange is right for you) For questions on 1031 Exchanges contact:

Old Republic Exchange

Julie Bratton

Vice President & Regional Sales Executive
900 Fort Street Mall, Suite 955
Honolulu, HI 96813
877-591-1031
jbratton@oldrepublicexchange.com

You may have heard this phrase before, you may already be familiar with what it is, or you may not know what it is at all. Whichever category you fall under, you are most likely interested in a tax-efficient way of preserving capital invested in real estate.

Section 1031 of the Internal Revenue Code allows you to exchange real or personal property that was held for rental or investment purposes, or that was used in your trade or business (“relinquished property”), for other real or personal property that will also be held for rental or investment purposes, or that will be used in your trade or business (“replacement property”). This enables you to defer the payment of your ordinary income, capital gain, depreciation recapture and/or Medicare Surcharge (“Obamacare”) income tax liabilities.

Income Tax Consequences. The sale of investment real estate or personal property (non-real estate) may result in the recognition of ordinary income, capital gain, depreciation recapture and/or Medicare Surcharge (“Obamacare”) income tax liabilities. Payment of these income tax liabilities reduces the amount of cash available for reinvestment and makes it difficult for you to reinvest in larger, more profitable properties. Using a 1031 Exchange, you can defer the payment of your income tax liabilities, keeping 100% of your cash working for you by reinvesting in replacement property.

The 1031 Exchange is certainly a great transaction tool to defer the payment of your income tax liabilities when you sell investment real estate, but it is much more than that. It is also a great wealth building tool. It allows you to continually defer the payment of your capital gain and depreciation recapture income tax liabilities over your lifetime. This means that you continue exchanging properties as a life-long strategy, always deferring the payment of your income tax liabilities and keeping your equity working for you. Using this strategy, the value of your real estate portfolio, and consequently your net worth, will grow exponentially faster over your lifetime as you continually defer the payment of your income tax liabilities.

After your death, your heirs will inherit your property and receive a step-up in cost basis equal to the fair market value of the property at the time of your death. Your heirs can immediately sell the property without incurring any capital gain and/or depreciation recapture

Hawaii Revised Statutes (“HRS”) Section 235-68, requires the buyer who purchases real property from a non-resident of Hawaii to withhold 7.25%+ of the amount realized (generally the sales price) and remit it to the Department of Taxation within 20 days of closing unless an exemption applies.

The 7.25% withholding represents an estimate of the Hawaii capital gains tax that may be owed by the non-resident when selling real property in Hawaii.
The standard Hawaii Association of Realtors Purchase Contract provides that escrow is to withhold and remit the HARPTA amount to the Department of Taxation unless the seller provides the buyer with a certificate of exemption or waiver from HARPTA.

It is the seller’s burden to prove that an exemption / waiver applies and for the buyer to acknowledge and approve the seller’s exemption / waiver prior to closing. Under Hawaii law, it is the buyer’s responsibility to determine if the seller is a non-resident of Hawaii and that the proper withholding amount is remitted to the Department of Taxation on a timely basis.

The Foreign Investment in Real Property Tax Act (section 1445 of the IRC code) of 1980 (“FIRPTA”) provided that foreign investment in U.S. real estate would be subject to U.S. capital gains tax on dispositions of U.S. real property interests Every Buyer is required to deduct, withhold and pay to the Hawaii Department of Taxation 15% of the amount realized (typically the sales price).

Foreign investors who are using the property as their principal residence will only be charged withholding tax of 10%, if the gross sales price is greater than $300,000, but equal to or less than $1,000,000.

The withholding percentage represents an estimate of the federal capital gains tax that may be owed by the foreign seller when selling real property in the United States.

The standard Hawaii Association of REALTORS® Purchase Contract provides that escrow is to withhold and remit the FIRPTA amount to the IRS unless the seller provides the buyer with a certificate of exemption or waiver from HARPTA.

It is the seller’s burden to prove that an exemption / waiver applies and for the buyer to acknowledge and approve the seller’s exemption / waiver prior to closing. Under federal law, it is the buyer’s responsibility to determine if the seller is a foreigner subject to FIRPTA withholding and that the proper withholding amount is remitted to the IRS on a timely basis.

Any buyer who fails to comply with FIRPTA withholding at closing may be held liable by the IRS for the tax, penalty and interest.