Hawaii follows federal 1031 exchange rules with a 7.25% withholding requirement for non-residents under HARPTA, though an exemption is available for 1031 exchanges.
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.
Important regulations and tax implications for your exchange
2% to 11% (progressive)
Yes
7.25% of gross sales price
$0.10 to $1.25 per $100 of value
4% (4.5% on Oahu)
• Federal Form 8824 • Hawaii Form N-103 (for reporting the exchange) • HARPTA Form N-289 (for non-residents claiming exemption from withholding) • Complete closing statements for both properties • Qualified Intermediary agreement
None
Informational step-by-step guide for your 1031 exchange
You must identify potential replacement properties within 45 days of selling your relinquished property. In Hawaii, consider regional market differences, island-specific regulations, and natural hazard zones when identifying properties.
Work with a qualified intermediary to handle the exchange funds and documentation. Hawaii has several experienced QIs who understand the local market and can help navigate the state's unique considerations.
Complete the purchase of your replacement property within 180 days of selling your relinquished property. Be aware of Hawaii's conveyance tax, which will apply to the transaction.
Report your 1031 exchange on your federal tax return using Form 8824 and on your Hawaii state tax return using Form N-103. If you're a non-resident, ensure you've filed form N-289 to claim exemption from the HARPTA withholding requirement.
If you're a non-resident selling investment property in Hawaii as part of a 1031 exchange, you must file form N-289 (HARPTA Withholding Certificate) at closing to avoid the 7.25% withholding requirement. Work with your settlement agent in advance to ensure this form is properly completed and submitted.
Hawaii's real estate markets vary significantly between islands. Oahu has the most developed market with higher density and more commercial options, while Maui, Kauai, and the Big Island offer more vacation rental and luxury residential opportunities. Research island-specific regulations, zoning requirements, and market trends when selecting replacement properties.
Hawaii properties may be subject to unique natural hazards including lava zones, tsunami zones, flood zones, and hurricane exposure. Conduct thorough due diligence regarding these natural hazards when selecting replacement properties, as they can significantly impact insurance costs, financing options, and future resale potential.
Recent changes and upcoming regulations affecting 1031 exchanges
Recent legislative updates have shown that the 1031 Exchange is not currently under threat, which is a relief for many investors. While there were no significant changes to Section 1031 of the Tax Code in 2024, 2025 may bring new proposals that could potentially affect 1031 Exchanges.
The Hawaii Real Estate Commission held a meeting discussing 'Residential Tax Rules, 1031 Exchange, and Foreign Investors' as part of their continuing education program.
Public hearing on the Commission's proposed Repeal of Hawaii Administrative Rules, which includes discussion of 'Section 1031 Real Property Like-Kind Exchanges'.
Plan and track your critical exchange deadlines
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Detailed analysis of key real estate markets in your area
Different regions within this state offer unique opportunities and challenges for 1031 exchanges. Here's an overview of key regional markets and their characteristics.
Honolulu offers a diverse urban market with strong government and military presence, tourism industry, and growing technology sector.
Maui offers a luxury tourism-driven market with strong vacation rental potential and limited development.
Big Island offers a diverse market with more affordable options, strong vacation rental potential in resort areas, and unique considerations including lava zones.
Kauai offers a luxury tourism-driven market with strict development regulations and strong vacation rental potential in permitted areas.
Investment property insights for Hawaii
Vacation rental properties in Hawaii offer attractive returns in areas with legal permits, though regulations are becoming increasingly strict across all counties.
Luxury residential properties in Hawaii present strong appreciation potential with moderate cash flow, particularly in established luxury markets like Wailea, Kapalua, and Kahala.
Multifamily properties in Hawaii offer stable returns with strong tenant demand, particularly in urban Honolulu and growing areas on neighbor islands.
Commercial and mixed-use properties in Hawaii offer moderate returns with stability in certain submarkets, particularly in urban Honolulu and resort areas.
Local tax benefits and programs for property investors
Beyond the tax deferral benefits of a 1031 exchange, this state offers additional tax incentives that can further enhance your investment returns. Review these programs to see if your replacement property might qualify. Please contact a tax professional prior to electing any tax incentive to determine if there are any additional tax concerns or benefits available to you.
Tax incentives for businesses in designated Enterprise Zones, which can benefit commercial property owners through increased tenant demand and property values.
GET exemption, income tax credit, and unemployment insurance tax credit
7 years
Submit application to Department of Business, Economic Development & Tourism, receive approval, and meet ongoing reporting requirements
Tax credit for installation of renewable energy systems, which can benefit property owners by reducing operating costs and increasing property values.
35% of cost for commercial properties (subject to caps)
One-time credit
Claim credit on Hawaii income tax return with required documentation
Tax credit for development of affordable rental housing, which can benefit investors in qualifying multifamily properties.
Annual credit for 10 years based on qualified basis
10 years
Submit application to Hawaii Housing Finance and Development Corporation, receive allocation, and meet ongoing compliance requirements
Real 1031 exchange examples from Hawaii
Current market conditions and future forecasts
Balanced with 4% increase in homes sold YoY.
Strong seller's market with limited inventory.
Growing market with 13% median price increase in February 2025.
Strong seller's market with limited inventory.
Long-term appreciation analysis in Hawaii
Understanding historical property appreciation patterns can help you identify areas with strong long-term growth potential for your 1031 exchange replacement property.
6.2%
58.7%
156.4%
Moderate growth expected, particularly in areas with new development
7.8%
64.3%
172.5%
Strong continued growth expected, particularly in luxury properties
13.0%
72.6%
148.9%
Strong growth expected, with 13% median price increase in February 2025
8.5%
67.8%
162.3%
Moderate to strong growth expected, particularly in luxury properties
Current rental trends and opportunities in Hawaii
Understanding the rental market is crucial when selecting investment properties for your 1031 exchange. This analysis provides insights into current rental conditions across the state.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Condos | $3,000 - $5,000 (1BR) | 5.2% | up | 3.5% - 4.5% |
| Mid-Range Apartments | $1,800 - $2,500 (1BR) | 4.8% | up | 4.5% - 5.5% |
| Single Family Homes | $3,000 - $6,000 (3BR) | 3.5% | up | 3.8% - 4.8% |
Honolulu's rental market includes a diverse mix of young professionals, military personnel, and families. Approximately 40% of renters are under 35 years old. The market has a significant military component due to the presence of several bases.
Honolulu has implemented some rent control measures for certain properties. The regulatory environment is becoming more tenant-friendly, with new regulations on security deposits and eviction procedures. Short-term vacation rentals are strictly regulated in most residential areas.
Honolulu's rental market is expected to remain strong with continued growth, particularly in areas near the new rail stations. The combination of limited supply, military presence, and tourism industry supports rental demand.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Vacation Rentals | $300 - $800 (nightly) | 35% (annual average) | up | 4.0% - 5.0% |
| Long-term Apartments | $2,200 - $3,500 (1BR) | 3.2% | up | 4.2% - 5.2% |
| Single Family Homes | $3,500 - $8,000 (3BR) | 2.8% | up | 3.5% - 4.5% |
Maui's rental market includes a mix of service industry workers, professionals, and seasonal residents. The market has a significant seasonal component due to tourism.
Maui County has implemented strict regulations on short-term vacation rentals, with permits required and many areas restricted. The county is actively enforcing these regulations with significant penalties for violations.
Maui's rental market is projected to see strong growth, particularly in areas with legal vacation rental permits. The combination of tourism, limited supply, and strict vacation rental regulations continues to drive rental demand.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Vacation Rentals | $200 - $500 (nightly) | 40% (annual average) | up | 4.5% - 5.5% |
| Long-term Apartments | $1,400 - $2,200 (1BR) | 4.5% | up | 5.0% - 6.0% |
| Single Family Homes | $2,000 - $4,500 (3BR) | 3.8% | up | 4.5% - 5.5% |
Big Island's rental market includes a mix of service industry workers, retirees, and remote workers. The market varies significantly between the Kona side (more tourism-focused) and Hilo side (more local and affordable).
Hawaii County has implemented regulations on short-term vacation rentals, with permits required in certain zones. The county is actively enforcing these regulations, though less aggressively than Maui County.
Big Island's rental market is expected to see moderate to strong growth, with 13% median price increase in February 2025. The combination of relative affordability compared to other islands and growing appeal to remote workers continues to drive rental demand.
Key mistakes to avoid in your 1031 exchange
Non-resident sellers of Hawaii property must file form N-289 at closing to claim exemption from the 7.25% withholding requirement for 1031 exchanges.
Work with your qualified intermediary and settlement agent well in advance of closing to ensure the proper exemption form is completed and submitted. Confirm that your settlement agent is familiar with 1031 exchanges and the HARPTA exemption process.
Hawaii counties have strict regulations on short-term vacation rentals, with many areas prohibiting them entirely or requiring special permits that are difficult to obtain.
Research county-specific vacation rental regulations during your due diligence period. Verify whether a property has legal vacation rental status and whether that status is transferable to new owners. Consider consulting with a local real estate attorney familiar with vacation rental regulations.
Hawaii properties typically have significantly higher operating costs than mainland properties, including higher insurance, maintenance, property management, and utility costs.
Conduct thorough due diligence on all operating expenses, including obtaining historical utility bills, insurance quotes specific to the property's location and natural hazard exposure, and accurate estimates for maintenance costs considering Hawaii's tropical climate and high labor costs.
Hawaii properties may be exposed to unique natural hazards including lava zones, tsunami zones, flood zones, and hurricane exposure, which can significantly impact insurance costs and financing options.
Obtain a comprehensive natural hazard disclosure report during your due diligence period. Research insurance costs and availability based on the property's specific location and hazard exposure. Consider consulting with a local insurance broker experienced with Hawaii properties.
Common questions about Hawaii 1031 exchanges
Yes, Hawaii fully conforms to federal 1031 exchange rules. If the Section 1031 exchange is valid at the federal level, it is valid at the state level, and Hawaii never gets to tax the gain deferred under federal law.
HARPTA (Hawaii Real Property Tax Act) requires 7.25% withholding on sales of real property by non-residents. However, an exemption is available for 1031 exchanges by filing form N-289 (HARPTA Withholding Certificate) at closing.
Hawaii imposes a state income tax on capital gains at rates ranging from 2% to 11% depending on your income level, which can be deferred through a 1031 exchange.
Yes, Hawaii counties have strict regulations on short-term vacation rentals, with many areas prohibiting them entirely or requiring special permits that are difficult to obtain. These regulations vary by county and zone, so thorough research is essential before purchasing a property intended for vacation rental use.