Quick answer: A 1031 exchange lets you defer capital-gains tax on the sale of investment or business real property by rolling the proceeds into like-kind replacement real property — a Maui condo or home held as a rental is a common destination. You must identify replacement property within 45 days of closing the sale and close on it within 180 days, and the sale proceeds must pass through a Qualified Intermediary — you can never touch the cash. A primary residence doesn't qualify, and foreign property isn't like-kind with U.S. property. This page is general information, not tax or legal advice — always confirm your specific situation with a CPA or tax attorney and a Qualified Intermediary before selling.

What is a 1031 exchange?

A 1031 exchange (named for IRC Section 1031) lets an investor defer paying capital-gains tax when selling investment or business real property, by using the proceeds to acquire like-kind replacement real property instead of cashing out. The tax isn't eliminated — it's deferred, with your cost basis carrying forward into the new property until you eventually sell without doing another exchange (heirs who inherit the property instead typically receive a stepped-up basis, though estate rules are their own topic). Since a 2017 change to federal tax law, Section 1031 applies to real property only — the personal-property exchanges (equipment, vehicles, and similar assets) that used to qualify no longer do.

What property qualifies as "like-kind"?

For real estate, "like-kind" is broader than most people expect. It generally just means U.S. real property held for investment or use in a trade or business, exchanged for other U.S. real property held the same way — the type, grade, or quality of the real estate doesn't have to match. A mainland rental condo can generally exchange for raw land, a commercial building, or another rental home. Two carve-outs matter: your primary residence does not qualify (personal-use property sits outside Section 1031 entirely — different rules, such as the Section 121 home-sale exclusion, apply there instead), and foreign real property is not like-kind with U.S. real property, so a property outside the U.S. can't be exchanged into or out of a U.S. 1031 exchange.

What are the 45-day and 180-day deadlines?

Two clocks start on the day you close the sale of your relinquished property. Within 45 calendar days, you must formally identify your candidate replacement property (or properties) in writing to your Qualified Intermediary. Specific IRS identification rules govern how many properties you can name and under what value limits — a "three-property rule" is commonly used, alongside other identification approaches — and the right one for your situation is fact-specific, so work through your identification list with your Qualified Intermediary or tax advisor rather than relying on a general rule of thumb. Within 180 days of the original closing (or the due date of your tax return for that year, including extensions, if that comes first), you must close on the replacement property. Both deadlines are strict, with generally no extension available for missing them.

What is a Qualified Intermediary, and why do I need one?

A Qualified Intermediary (QI) is an independent third party who holds the sale proceeds from your relinquished property in escrow between closings, then uses those funds to acquire the replacement property on your behalf. This isn't optional paperwork — it's structural to the exchange: if you, the taxpayer, ever have actual or constructive receipt of the sale proceeds, even briefly, the exchange is disqualified and the transaction is treated as an ordinary taxable sale. Any value you do receive that isn't like-kind real property — cash left over, or debt relief on the replacement property that isn't offset by new debt or additional cash — is called "boot" and is taxable even inside an otherwise valid exchange. Line up your Qualified Intermediary before you close on the relinquished property, not after.

Why do buyers use 1031 exchanges to buy on Maui?

"It's one of the more common paths we see bring investment dollars to Maui — someone sells a business or another property on the mainland, and a 1031 exchange is how they move those proceeds into a Maui rental property without a tax hit along the way," says broker Clint Hansen. We regularly work with buyers rolling sale proceeds from a business, a rental property, or other investment real estate into a Maui condo or home held as a long-term or vacation rental. One thing to plan for: because 1031 property must be held for investment or business use, how much you personally use the property matters. The IRS has safe-harbor guidance for vacation and rental properties used in a 1031 exchange that generally calls for limiting personal use and meeting minimum rental-activity thresholds — the specifics are technical, so confirm current guidance with your CPA before you buy if you plan to also use the property yourself. See our guide to buying a Maui vacation rental for more on the ownership and rental-use side, and our FAQ on Maui leasehold vs. fee simple if you're weighing ownership types for a replacement property. Our original 1031 overview has more background as well.

Does HARPTA still apply if I'm doing a 1031 exchange?

It can. HARPTA (the Hawaii Real Property Tax Act) withholding is triggered by a non-resident selling Hawaii real property, and that requirement doesn't automatically disappear just because the sale is part of a 1031 exchange. Exemption and reduced-withholding-certificate procedures exist for sellers who qualify — including specifically for 1031 exchanges — but they generally need to be filed and approved before or at closing, not after the fact. If you're a non-resident seller, including many foreign nationals (see our FAQ on foreign buyers in Hawaii for the related FIRPTA rules), planning a 1031 exchange involving a Hawaii property, loop in your CPA and Qualified Intermediary early so any HARPTA paperwork is handled before your 45-day clock even starts.

Not tax or legal advice. This page is general information about how 1031 exchanges work for educational purposes only and does not constitute tax, legal, or financial advice. IRC Section 1031 rules, identification procedures, deadlines, and Hawaii withholding requirements are technical, fact-specific, and subject to change. Before selling property with a 1031 exchange in mind, consult a CPA or tax attorney and retain a Qualified Intermediary — ideally before you list the relinquished property, not after you've already closed.

Talk to a Hansen

Planning a 1031 exchange into Maui real estate? 1031 exchanges are a team specialty, and Clint can help you line up the replacement-property side while your CPA and Qualified Intermediary handle the tax mechanics.
Clint Hansen, Broker (RB-21616) · 26 years serving Maui County · The Hansen Ohana, Maui Luxury Real Estate LLC (RB-21577)
161 Wailea Ike Place A-106, Wailea, Maui, HI 96753
Office: (808) 879-3667 · clinthansen@mauirealestate.net