A Quick Guide to a Hawaii 1031 Exchange for 2022

Buying/Selling Your Investment Property in Hawaii

Hawaii is a place where so many people love to vacation and one of the best places to buy property. This tropical paradise is a good way to participate in the section 1031 tax exchange in Hawaii. Buying an investment property here may have some amazing advantages. Everything you need to know about selling or selling your investment property is here in this guide.

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What Is a 1031 Exchange?

When you enter real estate, you will hear of something called a 1031 exchange, and it is something to keep in mind when you are buying and selling one or multiple properties. This tax-deferred exchange allows you to buy a property and then swap that property for another without paying capital gains. It allows the person or company to have a tax deferral and allows you or a business to have more capital for future investment properties.

Benefits of Hawaii 1031 Exchange?

Many new investors take advantage of the 1031 exchanges, but there are also many experienced investors that do as well. Using this strategy to purchase and exchange investment property, a real estate investor can receive many benefits. Here are some advantages to keep in mind if you are an investor looking at the 1031 tax exchange.


Using the 1031 tax exchange for Hawaii real estate can allow an investor to purchase a more valuable property. How? The investors can use the deferred taxes that they would have paid to the IRS as capital for their new investment. All of the money they didn’t use on taxes can be used as leverage for acquiring a new investment property.


An investor has the opportunity to exchange one property for others or a few others. They have opportunities to consolidate two complexes into one big house or vice versa. The 1031 tax exchange allows investors to diversify their portfolios and showcase their versatility in finding successful opportunities.

Less Management

Owning several properties can be expensive to manage because often, they need a lot of work to be maintained. An investor can limit this by investing in fewer properties that make more money, limiting the amount of work needed. The investor can pick a more passive investment property, such as a NNN lease, and reap the benefits of a low-maintenance property.

Increases Income

If you have a piece of land that makes no income, using the 1031 tax exchange law could help you exchange into a more productive investment property. This allows you the opportunity to increase cash flow in the future and use the money you’re not paying on taxes for another investment property.

It’s pretty clear why the 1031 tax exchange is good for investors. This can be exceptionally excellent when purchasing a primary residence in Hawaii or even a business property.

1031 Exchange Myths

If you are a new investor, you may have heard about the myths revolving around the 1031 tax exchange. Most of them are untrue, and we can go over the few of them floating around. This is one of the best opportunities to increase capital gains tax and new properties to expand and diversify a portfolio. Take a look at these myths and know they aren’t true.

1031 Tax Exchange is Only For The Wealthy

Every day people are taking advantage of this tax deferment to use for their advantage. Often, we only see big companies or wealthy people do it because that is what the media focuses on. However, it is not just for the wealthy. Many people can benefit from going this route, and it can help them earn more cash flow for other properties.

A 1031 Tax Exchange Needs To Be Simultaneous

When this code was first added in 1921, it is true that everything needed to be done simultaneously. However, that is no longer the case. It has expanded to allow more opportunities for exchange. The most common type of exchange is called a forward exchange which means the sale of one asset can go to the new asset within 180 days. This makes the process much more simple than trying to do it all at once and creates a stress-free way.

Like-Kind Means Exactly The Same

The truth is almost all real property can be exchanged for another kind. One business owner doesn’t need to buy another business property; they can exchange it for something else. People have misunderstood the term, and it has given the 1031 tax exchange a bad rep. There are tons of options that are open for real estate investors, and this myth is false.

It’s a Tax Loophole

This is a false myth that the 1031 tax exchange is not a tax loophole. It actually helps investors avoid unfair taxation. It also encourages more investors to reinvest that money in other properties, which helps boost the economy. This code may seem like a loophole, but it is not, and it is fair for the investors.

1031 Exchange Rules

There are certain rules that an investor will have to follow to take advantage of the 1031 tax exchange in Hawaii. It may seem daunting for beginners, but it will be straightforward once you understand the steps and actions to take. Here are seven rules to follow.

1.   Property Must Qualify

Not all properties will qualify for you to use the 1031 tax exchange for your advantage. The relinquished property or replacement property must be used for business only. This means you can own a vacation home that is a source of income for you and a type of business you own or something similar. It is one of the reasons Hawaii has become a suitable place for investors to buy, trade, and sell vacation homes. Every property must be for productive use.

2.   Holding Period

One of the most important things to remember is to never use this property for personal use. It will not be your vacation home, but a business where others stay and you reap the profits. This can sometimes be a disappointment for new investors. Still, to reap the benefits of the 1031 tax exchange, it has to be a business investment. There is no specific amount of time to establish the intended use for a property, which means it can be used right away. You cannot hold it for resale.

3.   Like-Kind Properties

This was on the myth list but remember that real estate has many options. It simply means that aircraft has to be exchanged for another aircraft, a property for another property, and so on. You can still take an apartment complex and exchange it for two homes in Hawaii if you are looking to do so.

4.   Purchasing In Time

Although you will have 180 days to acquire the relinquished property, you will only have a 45-day trial to find it. This may seem like a low number, but it is enough time to find the perfect investment, and many people start looking before they make any moves.

5.   Equal Value

The property you are interested in acquiring must be of equal or greater value than the property you are exchanging. All proceeds from the old property must go to the new property. You cannot keep the capital for yourself; it has to go into the new property.

6.   Identifying Properties

To take advantage of this code, you will need to identify the new property through three methods. 1. Three properties, no matter what their value is. 2. Any number of properties that are not worth 200 percent more than the older property. 3. Any number of properties as long as you purchase over 95% of the new properties.

7.   Qualified Intermediary

This means a person or a facilitator must hold the sale proceeds between the two properties. You will need a QI or qualified intermediary to help you exchange one property for the next for it to be legal.

Once you understand these seven rules, it will be straightforward to start buying and selling property as an investor. You may find that it is easiest to work with a full team who can help you make the best decisions. Especially if it is your first time as a property investor in Hawaii.

Unique Rules of 1031 Tax Exchange in Hawaii

Keep in mind there are some rules that you need to keep in mind that are not under the general rules. There are two to focus on. One is called HARPTA and the other FIRPTA. They are two laws that are important to be kept in mind when buying properties in Hawaii.

This is explicitly for when non-residents who own a Hawaii home decided to sell their property. It means that 7.25% of the amount realized needs to be held; it is based on the sales price, not the profit. It is a tool that ensures taxes are correctly collected and fairly.

This stands for Foreign Investment in Real Property Tax Act (FIRPTA). Every investor should know what it means. It is crucial for the purchase of a real estate property in Hawaii as a non-resident. It is a tax law that is imposed on foreign people selling their properties. They will withhold 15% of the amount realized on a property.

How To Qualify

Both properties, the one you have and the one you are looking to acquire, must be located in the United States. Each building must be held for productive use. This might include things like vacation homes, apartment buildings, industrial sites, and more. Both properties will have to be similar in that way, and it can give you a variety of options. It will not apply to your personal residence.

Types of 1031 Tax Exchanges in Hawaii

If you are an investor looking in Hawaii, it can be a great place to start a vacation rental business. It is one of the best places to invest and reap the rewards of owning a business. The types of properties include more than vacation homes.

Delayed Exchanges

This means you have 180 to relinquish one property in exchange for the new one. This can sometimes make it much easier when going from one property to the next and is one of the most common methods. However, keep in mind you only have 45 days to find the new property you want.

Reverse Exchange

Instead of giving up your property after you find the new property, it is the opposite. You will purchase the new property first and then give up your old property. This exchange must also take place within 180 days.

Improvement Exchange

This allows you to exchange funds to improve your replacement property in Hawaii. You will not be able to improve a property you already own. Improvements also have to be made within 180 days.

Simultaneous Exchange

This exchange means you give up the old property at the same time you acquire the new one. It is not done as often as you may think.

Straightforward Process

First, sell the property that you currently own, then you will identify the new property you intend to own. Finally, you will purchase the new property. This is a simple process, but you will need a good team behind you. It may be wise to have an accountant, a real estate investor, and a QI ready to go before starting this journey.

Is a 1031 Exchange in Hawaii Right For You?

If you already own a vacation home or an apartment in Hawaii and you have been meaning to diversify your investment portfolio, this is the best way to do it. You will receive many more advantages by using the IRS section 1031 code over other ways of investing. 

Contact an Agent Today!

Our 1031 exchange experts will discuss with you your options to buy or sell your property in Hawaii.

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