Tony Kawaguchi, M.Div., R.A.
REMAX 808 Realty
The best Real Estate office in Hawaii!
808-395-5776
alohatony@gmail.com
Hawaii 1031 Exchange Information
1031 Exchange in Hawaii
Hawaii has a very high percentage of rental properties, as you might
imagine. From small Waikiki condos up to multi million dollar
beachfront homes, rental properties abound on Oahu. Since many owners
would like to sell their properties and cash in the gain, avoiding the
huge capital gains tax is an important issue to understand.
One way to avoid taxes, or at least delay them, is through a 1031
exchange. A 1031 exchange allows you to exchange Hawaii real estate
property for a like-kind, so that no gain is realized and no tax is
paid on the sale. In an exchange, a property owner sells one or more
properties, let's say a rental condo in Ala Moana, for one or more
replacement properties of like-kind, let's say a rental single family
house in Montana, deferring the payment of federal taxes and some state
taxes. Since the property is sold without the owner actually receiving
any money, there is no tax paid at that time.
This is very popular in Hawaii and it has helped thousands of people
avoid or delay taxes. But someday when the property is sold without an
exchange, the owner may be subject to tax. Unless of course the person
moves into the house and lives in it for a few years, long enough to
satisfy the new IRS rules.
There are many many rules for 1031 exchanges that must be followed.
Before you sell your Waikiki rental condo and put an offer on a Hawaii
Kai single family home, make sure you understand the 1031 rules, and
work with a Realtor who understands them even better than you do. A
small mistake can cost you thousands of dollars in taxes!
First you have to find an intermediary, or an accommodator, who makes
sure that the rules are followed and that no money is taxable. Title
and escrow companies can act as intermediaries, and here in Hawaii I
recommend First American accommodation for this service. The
accommodator holds the money, watches the timelines, and makes sure the
funds are dispersed correctly. There are many other companies here in
Oahu who perform this service, so you should check around and get the
best service.
In an exchange, timing is everything, so you must identify and inform
an intermediary before you sell your investment property. After the
sale of your property, the IRS gives you 45 days to identify the
property you want to buy with your profits and 180 days to complete
that transaction. You may identify up to three properties within the
45-day period.
The disadvantages of a 1031 exchange include a reduced cost basis for
depreciation in the new property. The tax basis of replacement property
will be the purchase price of the replacement property minus the
deferred gain on the relinquished property. So the replacement property
includes a deferred gain that will be taxed in the future when the
house is sold without an exchange.
RULES
The Replacement Property's Title Must Be Taken In The Same Way As The
Relinquished Property. If a husband and wife own property in joint
tenancy or as tenants in common, the replacement property must be
deeded to both spouses, either as joint tenants or as tenants in
common.
The Replacement Property Must Be Like-Kind. Like-kind replacement
property means any real estate held for income, investment or business
use. A house in Manoa can be replaced with vacant land in Kailua, as
long as both are for investment. Land in Kaneohe can be replaced with a
condo in Waikiki.
One property can be exchanged for two or more properties. Two or more
properties can be exchanged for one replacement property, and as long
as the new property is worth more than the old one by at least $1,
there will be no tax. Investment property can be exchanged for business
property.
However, a personal residence cannot be exchanged for anything.
Any Boot (gain, money) received will be taxable. This is okay when the
seller is willing to pay some taxes. Otherwise, boot should be avoided
in order for a 1031 Exchange to be completely tax-free.
If you´re considering a 1031 exchange in Hawaii, I can
help you make sure it's a smooth process that conforms to the rules.
