1031 Exchange & DST Investing in Hawaii
Hawaii conforms to Section 1031 and caps the capital-gains rate at 7.25%, but nonresident sellers face a 7.25% HARPTA withholding that a qualifying exchange can exempt. Limited land and high values lead many Hawaii owners to diversify into mainland DSTs.
State tax treatment of a 1031 exchange
Hawaii conforms to Section 1031, so a properly structured exchange defers Hawaii income tax on the gain. While Hawaii's top ordinary income rate is higher, long-term capital gains are subject to an alternative maximum tax rate of 7.25%. Under the Hawaii Real Property Tax Act (HARPTA), the buyer must generally withhold 7.25% of the amount realized on a sale by a nonresident, though an exemption is available when the disposition qualifies as a 1031 exchange.
Hawaii does not impose a clawback or continued-reporting requirement for gain deferred into out-of-state replacement property.
Market snapshot
Honolulu on Oahu is Hawaii's primary market, with additional activity on Maui and the Big Island. Multifamily, neighborhood and resort retail, and hospitality assets dominate, reflecting a tourism-driven economy and severe constraints on developable land.
Scarce supply supports high values and low vacancy but limits the pool of institutional-quality replacement property. As a result, many Hawaii owners of appreciated real estate look to the mainland to diversify and access passive management.
Why 1031 & DST investors look here
- Capital gains capped at 7.25% with full Section 1031 conformity
- Severe land constraints support durable values
- Limited local inventory encourages diversification into mainland assets
Replacement-property options
Replacement property need not be in Hawaii — like-kind real estate is nationwide. Hawaii owners frequently exchange into DSTs, 721 UPREIT structures, or Opportunity Zone investments to move into passive, professionally managed mainland real estate, spreading concentration risk across markets and property types while preserving the federal and state deferral.
Frequently asked questions
Does Hawaii tax a 1031 exchange?
Hawaii conforms to Section 1031, so a valid exchange defers Hawaii tax; long-term gains are subject to a maximum 7.25% rate when eventually recognized.
Can I exchange Hawaii property for out-of-state DSTs?
Yes. Like-kind property can be located anywhere in the U.S., and Hawaii has no clawback rule requiring continued state reporting of the deferred gain.
What is HARPTA withholding?
HARPTA requires the buyer to withhold 7.25% of the amount realized when a nonresident sells Hawaii real property; a qualifying 1031 exchange can be exempt from the withholding.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.