1031 Exchange in Hawaii
Hawaii conforms to federal 1031 exchange rules and imposes a graduated state income tax ranging from 1.4% to 11%, though net capital gains are taxed under an alternative rate capped at 7.25% (HRS §235-51(f)). Non-resident sellers of Hawaii real estate are subject to a 7.25% withholding requirement under the Hawaii Real Property Tax Act (HARPTA), but an exemption is available for a qualifying 1031 exchange by providing Form N-289 to the buyer at closing. Hawaii's unique geography and limited land supply make it a notable destination for 1031 exchange investors, subject to island-specific regulations and natural-hazard considerations.
Fast Facts
- State Income Tax on Capital Gains
- 7.25% maximum (alternative capital gains rate). Hawaii's graduated income tax runs from 1.4% to 11%, but net capital gains are taxed under an alternative rate capped at 7.25% (HRS §235-51(f)). This tax can be deferred through a qualifying 1031 exchange.
- Conforms to Federal 1031
- Yes. Hawaii conforms to IRC Section 1031. If the exchange qualifies for deferral at the federal level, the gain is deferred for Hawaii income tax purposes as well.
- Non-Resident Withholding (HARPTA)
- 7.25% of the amount realized. Hawaii requires 7.25% withholding on sales of real property by non-residents under HARPTA (HRS §235-68), but no withholding is required if the seller provides the buyer a properly completed Form N-289 certifying that the transfer qualifies for federal nonrecognition treatment, such as a qualifying 1031 exchange.
- Conveyance Tax
- $0.10 to $1.00 per $100 of value; $0.15 to $1.25 per $100 for condos and single-family homes where the buyer is ineligible for a county homeowner's exemption (HRS §247-2). The rate scales with the property's sale price.
- General Excise Tax (GET)
- 4% state rate plus a 0.5% county surcharge in all four counties (4.5% combined; surcharges currently in effect through 2030). GET applies to gross business income, including rental income from investment properties.
Legal and Tax Considerations
State Income Tax on Capital Gains
7.25% maximum (alternative capital gains rate). Hawaii's graduated income tax runs from 1.4% to 11%, but net capital gains are taxed under an alternative rate capped at 7.25% (HRS §235-51(f)). This tax can be deferred through a qualifying 1031 exchange.
Conforms to Federal 1031
Yes. Hawaii conforms to IRC Section 1031. If the exchange qualifies for deferral at the federal level, the gain is deferred for Hawaii income tax purposes as well.
Non-Resident Withholding (HARPTA)
7.25% of the amount realized. Hawaii requires 7.25% withholding on sales of real property by non-residents under HARPTA (HRS §235-68), but no withholding is required if the seller provides the buyer a properly completed Form N-289 certifying that the transfer qualifies for federal nonrecognition treatment, such as a qualifying 1031 exchange.
Conveyance Tax
$0.10 to $1.00 per $100 of value; $0.15 to $1.25 per $100 for condos and single-family homes where the buyer is ineligible for a county homeowner's exemption (HRS §247-2). The rate scales with the property's sale price.
General Excise Tax (GET)
4% state rate plus a 0.5% county surcharge in all four counties (4.5% combined; surcharges currently in effect through 2030). GET applies to gross business income, including rental income from investment properties.
Required Documentation
- Federal Form 8824 (a copy is attached to your Hawaii return, Form N-11 or N-15)
- HARPTA Form N-289 (for non-residents claiming exemption from withholding)
- Complete closing statements for both properties
- Qualified Intermediary agreement
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
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.
- 2
Engage a Qualified Intermediary
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.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your tax return due date, including extensions, if earlier). Be aware of Hawaii's conveyance tax, which will apply to the transaction.
- 4
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824, and attach a copy to your Hawaii state return (Form N-11 for residents or N-15 for non-residents). Hawaii conforms to IRC Section 1031, so no separate state exchange form is required. If you're a non-resident, ensure you provided Form N-289 at closing to claim exemption from HARPTA withholding.
- 5
HARPTA Withholding Exemption
If you're a non-resident selling investment property in Hawaii as part of a 1031 exchange, provide the buyer with Form N-289 (Certification for Exemption from the Withholding of Tax) at closing, certifying that the transfer qualifies for federal nonrecognition treatment, to avoid the 7.25% HARPTA withholding. Work with your settlement agent in advance to ensure this form is properly completed.
- 6
Island-Specific Considerations
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 conditions when selecting replacement properties.
- 7
Natural Hazard Disclosure
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.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Failing to file HARPTA withholding exemption
Issue
Non-resident sellers of Hawaii property must provide the buyer with Form N-289 at closing to claim exemption from the 7.25% HARPTA withholding for a qualifying 1031 exchange. Without it, the buyer must withhold 7.25% of the amount realized, tying up funds you may need for the exchange until you file for a refund.
Prevention
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.
Overlooking vacation rental regulations
Issue
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.
Prevention
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.
Underestimating operating costs
Issue
Hawaii properties often carry higher operating costs than comparable mainland properties, including insurance, maintenance, property management, and utilities.
Prevention
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 labor costs.
Ignoring natural hazard exposure
Issue
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.
Prevention
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.
Frequently Asked Questions
Does Hawaii conform to federal 1031 exchange rules?
Yes, Hawaii conforms to IRC Section 1031. If the exchange qualifies for deferral at the federal level, the gain is deferred for Hawaii income tax purposes as well. Note that the tax is deferred, not eliminated — Hawaii-source gain may still be taxed if and when it is eventually recognized in a taxable sale.
What is HARPTA and how does it affect 1031 exchanges?
HARPTA (the Hawaii Real Property Tax Act, HRS §235-68) requires the buyer to withhold 7.25% of the amount realized when a non-resident sells Hawaii real property. However, no withholding is required if the seller gives the buyer a properly completed Form N-289 certifying that the transfer qualifies for federal nonrecognition treatment — which includes a qualifying 1031 exchange (see Hawaii Tax Facts 2010-1). If the exchange partially fails or the seller receives boot, withholding can apply to that portion.
What is Hawaii’s state income tax rate on capital gains?
Hawaii’s graduated income tax runs from 1.4% to 11%, but net capital gains are taxed under an alternative rate capped at 7.25% (HRS §235-51(f)). This tax can be deferred through a qualifying 1031 exchange.
Are there any special considerations for vacation rental properties in Hawaii?
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.
Major Cities
Honolulu, Hilo, Kailua, Kaneohe, Waipahu, Pearl City, Kahului, Kihei, Lihue, Kapaa, Wailuku, Mililani, Kona, Lahaina, Ewa Beach
References
Official References
- Hawaii Department of Taxation
- HARPTA – Withholding Tax on Sales of Hawaii Real Property by Nonresident Persons (Hawaii DOTAX)
- Hawaii Tax Facts 2010-1: Understanding HARPTA (Rev. April 2025)
- Outline of the Hawaii Tax System as of July 1, 2025 (Hawaii DOTAX)
- County Surcharge on General Excise and Use Tax (Hawaii DOTAX)
- Hawaii Real Estate Commission
- IRS: Like-Kind Exchanges Under IRC Section 1031
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.