Using a 1031 Exchange on Maui

Maui · Investment Strategy

The moment your Kihei condo closes, you do not get the money. The wire goes to your qualified intermediary, a third party you had never met before this deal, and a clock starts. Forty-five days to name what you will buy next. A hundred and eighty to close on it. Miss either deadline and the tax you were deferring comes due, in full, that year.

A 1031 exchange, named for the section of the Internal Revenue Code that authorizes it, lets you sell an investment property and roll the entire gain into another one without paying capital gains tax on the sale. The tax is not forgiven. It is deferred, pushed down the road into the next property, and the one after that. Done right, it can be deferred for the rest of your life.

Investors on Maui use it constantly, because the numbers here are large enough to make the deferral worth the paperwork. A South Maui condo bought in 2014 and sold today can carry a gain well into seven figures. The federal capital gains bite on that, plus Hawaii’s, is real money to hand the government in a single April. The exchange lets you keep it working instead.

The property has to be held for investment or business use. The Wailea home you use yourself six weeks a year does not qualify. The Wailea condo you rent out does. Raw land held for appreciation qualifies. A vacation rental qualifies. The house you live in does not — that lives in a different part of the tax code.

“Like-kind” sounds restrictive and is not. For real estate, almost any investment property is like-kind to any other. You can exchange a Kihei condo for a Lahaina storefront, a Ha’iku parcel for an apartment building in Denver, one rental for three of them. The test is the nature of the property — real estate held for investment — not its type or its location.

One thing the exchange no longer covers is personal property. The 2017 Tax Cuts and Jobs Act narrowed Section 1031 to real property only. Before that you could exchange equipment, aircraft, even breeding livestock and racehorses. Now it is real estate or nothing.

Here is where the exchange gets unforgiving. From the day your sale closes, you have two deadlines, and they run at the same time, not one after the other:

•    45 days to identify your replacement property in writing.

•    180 days to close on it.

Neither the IRS nor a hurricane will extend them. There are three ways to identify the replacement:

•    The three-property rule — name up to three properties, at any value.

•    The 200% rule — name any number, so long as their combined value stays under 200% of what you sold.

•    The 95% rule — name any number at any value, provided you close on 95% of the total you named.

Most people use the three-property rule and move on.

On Maui, the 45-day clock is the part that keeps investors up at night. In a market this thin, at these prices, finding a replacement you would want to own inside six weeks is the real constraint — not the tax rule, the inventory. Sellers here routinely line up the replacement before they ever list the property they are selling.

The rule that trips people up is this one: you cannot take receipt of the sale proceeds, not even for a day. The moment the money lands in your account, the exchange is dead and the gain is taxable. So the proceeds go to a qualified intermediary, a licensed third party who holds the funds and buys the replacement on your behalf. You choose the intermediary before closing. You do not use your cousin, your agent, or your own attorney — the IRS disqualifies anyone who has served as your agent. I have several amazing 1031 Specialists who I use frequently. Reach out directly for more information.

To defer the whole gain, two things have to be true: you buy a replacement of equal or greater value, and you reinvest all of the equity. Take cash out, or trade down to something cheaper, and the difference — “boot,” in the trade — is taxable. Boot is not a penalty. It is the part you did not reinvest, taxed the way it would have been anyway.

Federal rules are only half of it. Hawaii conforms to Section 1031, so the state honors the same deferral on its own capital gains tax and a properly structured exchange defers both. Hawaii does not impose a California-style clawback that trails your deferred gain to the mainland and taxes it later. You report the exchange to the state on Form N-103 and to the IRS on Form 8824, and the reporting is done.

The wrinkle is HARPTA. When a non-resident sells Hawaii real estate, the buyer is required to withhold 7.25% of the gross sale price and send it to the state — an estimated tax payment against a gain that, in an exchange, is never recognized. So it should not apply. It applies anyway, by default, unless you stop it.

There is a specific reason Maui investors are studying 1031 exchanges this year. Bill 9, adopted as Ordinance 5909, phases out short-term rentals in apartment-zoned districts: West Maui by the end of 2028, South Maui by the start of 2031. Owners of apartment-zoned condos that have run as vacation rentals are weighing whether to hold, convert, or exit.

For those who decide to exit, a 1031 exchange is the tool that moves the equity into something the phase-out does not reach — hotel-zoned condo inventory that keeps its rental rights, or investment property on the mainland — without surrendering a slice of the gain to taxes on the way out. Worth knowing: a short-term rental permit does not transfer with the title. The buyer’s use rights follow the property’s zoning, not the seller’s history. That makes the zoning of your replacement property the whole ballgame.

If you cannot find a replacement inside the 45 days — a real risk in this market — two backstops exist. A reverse exchange lets you buy the replacement first and sell the relinquished property after, inside the same clock structure. A Delaware Statutory Trust lets you place the proceeds into a fractional interest in institutional-grade real estate, which satisfies the exchange when no direct replacement materializes. Both add cost and complexity. Both beat a surprise tax bill.

The quiet part of the 1031 is what happens if you never sell for cash. Exchange into a new property, hold it, exchange again, and the deferred gain rides along untaxed. When you die, your heirs inherit at the stepped-up market value and the deferred gain disappears. Investors call it “swap till you drop.” It is one of the few corners of the tax code where patience pays this directly.

For anyone worried the rule is about to vanish: it survived the 2025 tax package intact. The One Big Beautiful Bill Act, signed in July 2025, left Section 1031 fully in place, and the proposals to cap deferrals never made it into law. The exchange is available in 2026 on the same terms it has carried for years.

A 1031 exchange is straightforward enough in concept and unforgiving in execution. The deadlines are hard, the intermediary is mandatory, and the Hawaii forms have to be filed on time or the withholding kicks in. Line up your qualified intermediary and your CPA before you list, not after you have closed.

When the wire leaves your closing and the clock starts, you want the next property already in view. On Maui, that is the difference between a clean exchange and an expensive scramble.

 Talk it through before you list

If you are weighing a sale and want to know whether an exchange fits — which of your properties qualify, what the replacement market looks like right now, and how the zoning changes reshape your options — that is a conversation worth having before the sign goes in the yard.