A Powerful Tool for Property Owners
By Aaron Kancevicius, 1031 Specialists
If you’re thinking about selling investment property in Hawaii or elsewhere, a 1031 exchange might be one of the most powerful tax strategies available to you.
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds into another investment property. Instead of paying taxes on the sale (which can easily be 30-40% of the gain), you get to keep your money working for you—compounding your portfolio over time.
How It Works
To qualify for full tax deferral:
- The property sold and the replacement property must be held for investment or business use.
- You must identify the replacement property within 45 days of the sale of your current property.
- You must close on the replacement property(s) within 180 days.
- You must use a Qualified Intermediary to handle the exchange.
Additionally, the purchase price of the new property must be equal to or greater than the net sales price of the old property, and you must reinvest all the net proceeds.
Example
Say you bought a rental property on the Big Island years ago for $300,000 and it’s now worth $700,000. If you sell, your capital gains could be over $400,000—potentially triggering six-figure taxes. But if you do a 1031 exchange into another investment property of equal or greater value, you defer those taxes and keep that capital compounding.
Plan Ahead Before You Sell
Timing is critical in a 1031 exchange. First, the exchange must be set up before closing on the sale property.
Next, once you close the sale, the clock starts ticking for identifying replacement property. That’s why I always tell clients: “If you’re thinking of selling, talk to your 1031 advisor first—not after.”
Common Uses in Hawaii
- Swapping single family rentals for larger multifamily rentals
- Selling out-of-state properties and moving investments back to Hawaii
- Exchanging vacation rentals for more passive, income-generating assets
- Selling vacant land for cash-flowing property
Done right, a 1031 exchange helps investors grow wealth tax-efficiently, reposition portfolios, and transition between markets.
