1031 exchange in
Hawaii.

Does Hawaii follow federal 1031 rules?

Hawaii conforms to federal Section 1031 for real property and has no clawback. The state imposes HARPTA (Hawaii Real Property Tax Act) withholding of 7.25% of the sales price on non-resident sales, with a 1031 exemption procedure via Form N-289 filed at closing. Hawaii's CRE inventory is unusual in that long-term leasehold land (especially Bishop Estate / Kamehameha Schools, military, and DHHL land) is common — pure fee-simple replacement is relatively scarce.

Hawaii capital gains tax structure

Hawaii taxes long-term capital gains at a preferential rate of 7.25% (2026), separate from ordinary income brackets that top out at 11%. The lower capital-gains rate is one of the few state-level preferential treatments in the country.

Hawaii is one of the few states that taxes long-term capital gains at a preferential rate (7.25%) below the ordinary income top bracket (11% on income above $200,000 single / $400,000 joint). For real estate gains, the 7.25% rate generally applies. There is also a General Excise Tax (GET) of 4% statewide plus 0.5% county surcharge in Honolulu County — GET applies to gross rental income on commercial property, which materially affects pro-forma NOI for 1031 underwriting (a Mainland investor used to Texas or Florida will model rents net and discover GET at the operating layer). Estimated tax payments are due quarterly when expected liability exceeds $500. Real property tax is administered at the county level and is comparatively low (Honolulu owner-occupied $3.05/$1,000; commercial rates higher), but classification rules vary by county.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Hawaii's state treatment sits on top of those federal rates.

Non-resident withholding in Hawaii

HARPTA (Hawaii Real Property Tax Act) imposes a 7.25% withholding on the gross sales price when a non-resident sells Hawaii real property, collected by the buyer at closing and remitted to the Hawaii Department of Taxation. The exemption procedure for a 1031 exchange uses Form N-289 (Certification for Exemption from the Withholding of Tax on the Disposition of Hawaii Real Property), signed by the seller and delivered to the buyer at closing. The N-289 must specifically identify the qualified intermediary and certify 1031 intent. If the form is not delivered timely, the buyer must withhold 7.25% and the seller files a Hawaii non-resident return (Form N-15) to recover, with refunds typically taking 6-12 months. Resident sellers are not subject to HARPTA regardless of property location.

Common 1031 replacement strategies in Hawaii

Hawaii 1031 replacement is a small, idiosyncratic, and expensive market. Honolulu (Oahu) is the deepest — Class A and B multifamily, condo, hospitality, and a handful of credit-tenant industrial assets. Maui County is the second-largest CRE market and has been reshaped by the August 2023 Lahaina wildfire — rebuilding is ongoing through 2026, hospitality is recovering, and direct fee-simple inventory is even tighter than pre-fire. Hawaii County (Big Island) is a different market entirely — agricultural, resort, and small-bay commercial; the volcano, vog, and lava-flow risk affect insurance underwriting in ways that Mainland buyers underestimate. Across all islands, leasehold land is common (especially Bishop Estate / Kamehameha Schools land in West Oahu, military land near Pearl Harbor and Hickam, and DHHL land), and the leasehold/fee-simple distinction is the first underwriting question — not a footnote. Pure fee-simple replacement at sub-$10M is genuinely scarce; many 1031 buyers end up in DSTs holding Mainland assets rather than direct Hawaii replacement.

Top Hawaii CRE markets for 1031 buyers

Honolulu

Oahu is the deepest CRE market in Hawaii by an order of magnitude. Class A urban multifamily in Honolulu trades 4.0–5.0% caps on stabilized product; Class B/A- holds 4.75–5.75%. Honolulu retail and credit-tenant NNN trades 5.5–6.5%. The leasehold-vs-fee-simple distinction is critical here — Bishop Estate / Kamehameha Schools holds vast leasehold land in West Oahu and parts of urban Honolulu, and lease-rent reset cycles on those parcels can destroy NOI underwriting. Always verify fee-simple status before identifying.

Maui County

Maui's CRE market has been reshaped by the August 2023 Lahaina wildfire — rebuilding is ongoing through 2026-2027, hospitality is recovering unevenly, and West Maui inventory is materially constrained. Pre-fire stabilized hotel and condo-hotel product traded 5.5–7.0% caps; current pricing is dispersed and underwriting-dependent. Class B multifamily in Kahului and Wailuku trades 5.5–6.5%. Insurance underwriting is the first conversation, not the last — some carriers have exited the West Maui market entirely.

Hawaii County

Big Island is the lowest-priced and least-liquid Hawaii CRE market. Hilo and Kona are the active submarkets — Hilo is government-services and university-anchored, Kona is resort and hospitality. Class B multifamily and small commercial trades 6.0–7.5%; resort and condo-hotel inventory in Kona varies widely with seasonality. Volcanic activity, vog, and lava-flow zoning materially affect insurance and underwriting — a 1031 buyer needs island-specific counsel, not Honolulu generalists.

Local counsel, recording, and filing in Hawaii

Hawaii's CRE bar is small, concentrated in Honolulu, and most active practitioners know each other — the network is tight. Retain a Hawaii-licensed real estate attorney for any closing, especially for leasehold deals where the lease document terms (rent reset cycles, renewal options, reversion provisions) drive the entire underwriting. Title is provided by Hawaii title companies (Title Guaranty, First American Hawaii, Old Republic) under attorney supervision. Recording is at the State Bureau of Conveyances, not at the county level — a key procedural difference from Mainland practice. For Lahaina-area Maui closings, expect additional environmental disclosure and rebuilding-permit complexity through at least 2027.

Recent developments in Hawaii

The August 2023 Lahaina wildfire on Maui destroyed approximately 2,200 structures and killed over 100 people — the most destructive wildfire in modern Hawaii history. Through 2026, the rebuild is ongoing: insurance disputes, federal disaster recovery funding, and new fire-resilience building codes are reshaping how Maui CRE underwrites. For 1031 buyers considering Maui replacement, get current bindable insurance quotes (some carriers have pulled back from West Maui entirely), confirm rebuilding-permit status on any improved property in the affected zone, and budget for post-fire infrastructure assessments. Statewide, the Hawaii legislature has debated several short-term-rental restriction bills targeting condo-hotel and vacation-rental operators — material for any 1031 buyer underwriting nightly-rental income.

Common mistakes in Hawaii 1031 exchanges

• Closing as a non-resident without filing Form N-289. If you're a non-resident seller of Hawaii real property and the buyer doesn't receive a properly executed Form N-289 at closing, the buyer must withhold 7.25% of the gross sales price under HARPTA — even when the transaction is a fully qualifying 1031 exchange. On a $4M Honolulu condo upleg, that's $290,000 sitting with Hawaii DOT that you spend the next 6-12 months recovering via a Form N-15 non-resident return. Get the N-289 prepared by Hawaii counsel before closing, not after.
• Underwriting Hawaii leasehold like fee-simple. Bishop Estate / Kamehameha Schools land, military land, and DHHL land are common in Hawaii — long-term ground leases on these parcels create CRE assets that look like fee-simple ownership but carry rent-reset cycles (typically every 30 years) that can multiply ground rent 3-5x in a single reset. A Mainland 1031 buyer used to fee-simple underwriting routinely misreads the leasehold structure and buys into a payment cliff that destroys NOI 15-20 years later. Read the ground lease before you bid, every time.
• Forgetting GET (General Excise Tax) on rental income. Hawaii's General Excise Tax of 4% (4.5% in Honolulu County with surcharge) applies to gross rental income on commercial property, paid by the landlord and typically passed through to tenants where the lease allows. Mainland investors model NOI net of operating expenses but forget GET — and on a $1M annual gross rent stream, the 4-4.5% GET is $40-45K of gross-margin friction that did not appear in the seller's pro forma. Add it to your underwriting before the LOI.

What to do if you're starting a Hawaii-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Hawaii-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Hawaii state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Hawaii

How does HARPTA withholding work for a 1031 exchange?

HARPTA imposes a 7.25% withholding on the gross sales price when a non-resident sells Hawaii real property, collected by the buyer at closing and remitted to the Hawaii Department of Taxation. For a qualifying 1031 exchange, the seller delivers Form N-289 to the buyer at or before closing certifying the qualified intermediary structure and 1031 intent — this exempts the transaction from withholding. If the form is not delivered, the buyer must withhold and remit, and the seller recovers by filing a Hawaii non-resident return (Form N-15). Recovery typically takes 6-12 months. Always have N-289 prepared by Hawaii counsel before the closing date.

Should I 1031 into Hawaii leasehold or insist on fee-simple replacement?

Both can qualify as 1031 replacement (a long-term ground lease with at least 30 years of remaining term is typically treated as real-property interest), but the underwriting is fundamentally different. Fee-simple ownership is what most Mainland buyers expect. Leasehold (especially Bishop Estate / Kamehameha Schools, military, DHHL) carries rent-reset cycles that can multiply ground rent at predictable intervals, often destroying NOI 15-20 years out if not modeled. If you're new to Hawaii CRE, push for fee-simple even at a higher price per door — the leasehold discount is usually narrower than the long-term risk warrants.

How is the post-Lahaina rebuild affecting Maui 1031 underwriting in 2026?

Materially. The August 2023 wildfire destroyed approximately 2,200 structures and the rebuild continues through 2026-2027. Multiple insurance carriers have pulled back from West Maui entirely, post-fire building codes have raised construction costs, and hospitality recovery has been uneven — some properties at pre-fire occupancy, others still struggling. For a 1031 buyer considering Maui replacement, get current bindable insurance quotes before identifying, confirm permitting status on any improved property in the affected zone, and budget for ongoing infrastructure-recovery friction. The opportunity exists but the underwriting is harder than pre-2023.

Does Hawaii's General Excise Tax (GET) apply to my CRE rental income?

Yes. Hawaii's GET of 4% statewide (4.5% in Honolulu County with surcharge) applies to gross rental income on commercial real estate, paid by the landlord. Most commercial leases allow pass-through to tenants, but the GET is part of your operating cost structure regardless. Mainland 1031 buyers used to states without a GET (Texas, Florida) frequently model NOI without the GET line and discover the gap post-closing. Build it into your pro forma at the LOI stage.

Can I 1031 a Hawaii condo into a Mainland warehouse?

Yes if both meet the held-for-investment test and standard 1031 like-kind requirements. The IRS treats all real property held for investment as like-kind to other real property held for investment, regardless of property type or geography. The trickier question is HARPTA on the Hawaii sale side — file Form N-289 to claim the exemption. The Mainland replacement does not create any Hawaii ongoing tax exposure (Hawaii has no clawback), but the Hawaii capital gain on eventual recognition outside an exchange would be Hawaii-source taxable.

Why is fee-simple replacement so scarce in Hawaii?

Roughly 30% of Hawaii's land is owned by the state and federal government, another large share is held by Bishop Estate / Kamehameha Schools and other large landowners under long-term leasehold structures, and developable fee-simple parcels are concentrated and expensive. The result is that institutional CRE inventory is heavily leasehold or held by long-time owners who don't sell. Sub-$10M fee-simple replacement candidates are genuinely scarce, which is why a meaningful share of Hawaii-resident 1031 sellers end up in DSTs holding Mainland assets rather than direct Hawaii replacement.