1031 Exchange Rules in Hawaii

Last reviewed: June 2026. State rules change. Verify current forms before closing.

What Is Different in Hawaii

Hawaii's withholding regime, known as HARPTA, is one of the steepest in the country: 7.25% of the amount realized, which generally means the full sales price, not the gain. A fully deferred 1031 exchange escapes it entirely with Form N-289. But Hawaii enforces an all-or-nothing rule that trips up more investors than any other feature: if you recognize any gain at all, even a small amount of boot, the N-289 exemption is off the table and the buyer must withhold the full 7.25% on the entire price. Precision matters here more than in any other withholding state.

Does Hawaii Conform to IRC Section 1031?

Yes. Hawaii follows the federal like-kind exchange rules for real property. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. If your exchange qualifies for federal deferral, Hawaii defers its income tax too. New to exchanges? Start with our 1031 exchange guide.

And to address a common worry: your replacement property does not need to be in Hawaii. The Department of Taxation's own guidance confirms a fully deferred exchange qualifies for the N-289 exemption no matter where the replacement property is located.

Hawaii Tax Rate on Real Estate Gains

Hawaii's top income tax rate is 11%, among the highest in the nation, though long-term capital gains are generally taxed under an alternative computation capped at 7.25%. On a $500,000 gain, the Hawaii bill can reach roughly $36,000 on top of federal taxes. A qualifying exchange may defer all of it.

HARPTA: 7.25% Withholding at Closing

Under HRS 235-68, the buyer of Hawaii real estate from a nonresident must withhold 7.25% of the amount realized, generally the gross sales price. On a $1,200,000 condo sale, that is $87,000 held back at closing unless an exemption applies. The buyer remits the withholding with Forms N-288 and N-288A within 20 days of the transfer.

How 1031 Exchangers Claim the Exemption: Form N-289

The seller gives the buyer Form N-289 at closing, checking box 2, which certifies that the transfer qualifies for nonrecognition under the Internal Revenue Code, including Section 1031. Two halves of the rule deserve equal billing:

• Fully deferred exchanges qualify. Per the Department of Taxation's Tax Facts 2010-1, a 100% deferred exchange is exempt, and the replacement property can be anywhere in the United States.
• Any recognized gain voids the exemption. If you take boot or complete only a partial exchange, you cannot use the N-289. The buyer must withhold the full 7.25% of the amount realized, not just on the boot. You then recover the excess by filing Form N-288C for a tentative refund or waiting for your annual Hawaii return.

There is a third path worth knowing: Form N-288B, the application for withholding reduction when there is no gain or insufficient proceeds. It must be filed at least 10 working days before the transfer, so it requires planning ahead, not a closing-week scramble.

Your qualified intermediary should review the exchange structure against these rules before closing. A qualified intermediary is the independent party that holds your sale proceeds during an exchange. WealthBuilder 1031 prepares exchange documentation that supports the N-289 certification and flags boot issues before they become withholding problems.

No Claw-Back After You Exchange Out

Hawaii has no claw-back rule. Once your fully deferred exchange completes, there is no annual Hawaii filing tied to the deferred gain, even if your replacement property is on the mainland.

Federal Taxes Still Apply

A Hawaii exchange defers two layers: federal and state. Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of a Hawaii rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, and basis. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Hawaii Exchanges

• Small boot, big withholding. Even modest cash boot voids the N-289 and triggers 7.25% withholding on the entire amount realized. Structure the closing so no unintended boot appears.
• Debt not offset. Mortgage relief that is not offset with new debt or additional cash on the replacement property creates recognized gain, with the same all-or-nothing consequence.
• Missing the N-288B window. The 10-working-day lead time means last-minute applications fail. Plan early if you need it.
• Slow refunds. If withholding hits, the N-288C tentative refund takes time, and that is equity sitting in Honolulu instead of in your replacement property.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply with no state extensions. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. The IRS and Hawaii will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Hawaii 1031 Exchange FAQs

What is HARPTA?
The Hawaii Real Property Tax Act withholding regime: buyers withhold 7.25% of the amount realized when buying Hawaii real estate from a nonresident, unless an exemption applies.

Does a 1031 exchange avoid HARPTA withholding?
Yes, if the exchange is 100% deferred. The seller certifies the exemption on Form N-289, box 2. Any recognized gain voids the exemption entirely.

Does my replacement property need to be in Hawaii?
No. The Department of Taxation confirms a fully deferred exchange qualifies regardless of where the replacement property is located.

What if I take a small amount of boot?
The N-289 cannot be used, and the buyer must withhold 7.25% of the full sales price. You recover the excess via Form N-288C or your annual Hawaii return.

What is Form N-288B?
An application to reduce or eliminate withholding when there is no gain or insufficient proceeds. It must be filed at least 10 working days before the transfer.

Sources

• HRS 235-68
• Hawaii Department of Taxation, Tax Facts 2010-1 (rev. Apr. 2025), Q31-32
• Hawaii DOT Forms N-289, N-288, N-288B, N-288C
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more?

Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Hawaii exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Hawaii 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Hawaii 1031 exchange services to get started.