When an investor sells an investment property for more than it was paid for originally, any profits from the sales price are subject to capital-gains taxes. There is however a way to defer capital gains taxes thanks to current IRS Section 1031 of the tax code. An investor can sell their previous investment property (aka the relinquished property) and utilize the equity to acquire a new investment property (aka the replacement property), and defer the capital-gains taxes that would typically be applied to the sale.
This 1031 Tax-Deferred Exchange allows an investor to reinvest the proceeds from the sale without having to pay additional taxes. That can be significant! In addition, for the state of Hawaii, typical withholdings for non Hawaii Residents and Foreign Nationals, such as HARPTA (7.25% of amount realized) and FIRPTA (15% of amount realized) are not applicable when conducting a qualified 1031 tax deferred Exchange.
To execute a 1031 exchange in Hawaii, you need to follow the following five guidelines and requirements set by the Internal Revenue Service for a successful like-kind exchange. Here are the general steps involved in completing a 1031 exchange:
Consult with a Local Real Estate Broker
(Like the Sayles Team!) Who has extensive experience in representing clients who buy and sell investment properties. Year after year, our team is the number #1 broker in representing clients for vacation rental condominiums on Maui. Our team can refer you to the best local tax advisors, the best local attorneys, and the best local 1031 facilitators who will make your exchange a top priority.
Engage a Qualified Intermediary
Before selling your current property, it’s crucial to hire a Qualified Intermediary (QI). The Qualified Intermediary is responsible for facilitating the exchange and ensuring compliance with IRS regulations. They will hold the funds from the sale of your relinquished property and use them to acquire the replacement property.
Identify the Replacement Property
Within 45 days from the sale of your relinquished property, you must identify potential replacement properties. You can identify up to three properties of any value or any number of properties as long as their combined value does not exceed 200% of the relinquished property’s value. The identification must be done in writing and provided to the Qualified Intermediary.
Close on the Replacement Property
After identifying the replacement property, you have 180 days from the sale of the relinquished property to close on the purchase of the replacement property. The QI will use the funds held from the sale of the relinquished property to acquire the replacement property on your behalf.
Complete the Exchange
Once the purchase of the replacement property is finalized, the qualified intermediary will transfer the title to you, completing the 1031 exchange. The process allows you to defer capital gains taxes that would have been incurred if the sale was not part of a like-kind exchange.
REMEMBER! Double Check Regulations
It’s important for you to consult with a qualified tax advisor or attorney experienced in 1031 exchanges to ensure compliance with IRS regulations and to handle the specific details of your transaction. Please also keep in mind that state-specific rules may apply in Hawaii, so consulting with a local professional familiar with Hawaii’s tax laws is recommended.
Our real estate market presents a vast range of opportunities to take advantage of 1031 Exchanges. From Maui oceanfront homes and short-term rental condos, to commercial real estate and vacant land. The Sayles Team has extensive experience in assisting investors across the entire state of Hawaii, and we have great relationships with all of the qualified local experts who can assist you. Our network of 1031 Exchange Intermediaries will make the process as seamless and cost effective as possible.
Disclaimer: this information is for demonstrative purposes only. This information is not deemed to be legal or financial advice. Please consult with an attorney, 1031 Exchange Facilitator, tax advisor, financial planner, or an other professionals with vast knowledge in the matter to better discuss your 1031 exchange goals.
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